Rise of the Robots (part 3)

May 24, 2017

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Because Ford’s book is focused on the loss of human jobs to robots, he has next to nothing to say about job creation. If, however, a higher level of intelligence enables human beings to do things that machines cannot, as Ford himself admits, maybe we can do more of those things as we turn over the narrower thinking tasks to the machines.

The personalized service frontier

If there is any new frontier in job creation that can escape the rise of the robots, I think it would be in the realm of personalized services, the least routine and predictable things we do. In fact, when a service professional is helping a client, the problem of predictability is compounded.  If you’re a legal professional, artificial intelligence systems that process information about laws, cases and legal documents will be a great help. But lawyers still have to apply the law to the unique circumstances of the client’s case, and that is a more creative task.

Similarly, thousands of students can listen to the same lecture online, but they need a creative teacher to engage with their particular thought processes as they struggle to reconcile new ideas with what they already think. That’s why many educators are talking about “flipping the classroom”–letting students gather more information online while changing the classroom from a lecture hall into a setting for more creative collaboration. If all that students know how to do is take in lectures and cough up the material for the test, they will be at risk of being replaced by a machine. We can give in to the machines, or accept the invitation to take education to a new level that requires smaller classes and more teachers.

In so many areas, people need more personalized services than they are getting. In addition to teachers and financial planners, they need mental health services, legal services, job training, drug treatment programs, child care, and of course affordable health care. The question is whether these services will remain scarce and expensive, or whether we can expand the market for them in the information economy.

Making services more economical

We can be fairly sure that many menial service jobs will eventually be more economically performed by robots than by humans. The days of supermarket checkout clerks are numbered. The problem for aspiring professors, counselors, financial planners, and so forth is a little different. It is not so much that robots will replace them, but that too few people will be able to afford their services, or that they themselves will not be able to afford the price of admission to their desired profession.

I can think of several ways that the information revolution could help. As automation lowers the cost of producing goods and routine services, people can spend a larger portion of their income on personalized services. And information technology should also save labor in the personalized services themselves, bringing costs down there as well. A lawyer assisted by artificial intelligence shouldn’t have to spend as long preparing a case. I know that as a financial planner assisted by sophisticated software, I was able to prepare a financial plan in a very reasonable amount of time and at a very modest cost. My plans always had a human element, with personalized commentary as well as machine-generated tables and charts, but the human-machine collaboration made the service more affordable for my clients.

The technology was also very affordable for me. I did have to rely on a financial software company that no doubt made more money than I did. Ford emphasizes the centralization of information capital, a situation in which a few companies controlling software and Big Data can dominate markets while employing very few workers. But there is another side to that. Information can be duplicated at a very low marginal cost. Software development may be costly, but as the cost is spread over more and more copies, the unit cost keeps shrinking. An aspiring financial planner or other service provider can subscribe to software support for a very modest annual fee. Such easy access to information capital should make it easier to create personalized service jobs.

A big price of admission to many service professions is the cost of education. Education is such a public good that its cost should be widely spread throughout society. Making students go heavily into debt in order to learn what they need in order to be contributing members of society is not a very sensible policy. Ford agrees, and he hopes that new technologies can reduce the cost of instruction. He seems less interested in expanding higher education, since he expects people at all levels of education to have trouble finding jobs. I am more interested in such expansion, because I believe that the jobs we can create will usually require more education than the jobs we destroy.

The role of the public sector

If we agree that education is a public good whose cost should be widely spread throughout society, that suggests a major role for the public sphere in making it more accessible and affordable. The same logic could be extended to other services. Services that contribute to the general health, education and welfare of the population constitute public goods that are worthy of some public funding. Not only do such services create jobs in themselves, but they can help people build their human capital and meet the demands of the advanced economy, keeping them one step ahead of the robots.

Ford isn’t very supportive of this kind of public funding. Here’s what he has to say about elder-care:

The main problem with elder-care robots as they exist today is that they really don’t do a whole lot….The realization of an affordable, multitasking elder-care robot that can autonomously assist people who are almost completely dependent on others probably remains far in the future….It might seem reasonable to expect that the looming shortage of nursing home workers and home health aids will, to a significant extent, offset any technology-driven job losses that occur in other sectors of the economy….[But] by the time the majority of older people reach the point where they need personal, daily assistance, relatively few are likely to have the private means to hire home health aids, even if the wages for these jobs continue to be very low. As a result, these will probably be quasi-government jobs funded by programs like Medicare or Medicaid and will therefore be viewed as more of a problem than a solution.

So here we have a valuable service that isn’t being provided either by robots or enough human workers, and yet Ford rejects the expenditure of more public money to fund it. Once again, that reveals his narrow focus on his recommended basic income guarantee to support consumption. In effect, he would rather have government pay people not to work than to work. We can find more work for robots, but not create more jobs for humans.

Public funding requires some form of taxation. Conservatives often oppose higher taxes, especially on the wealthy, on the grounds that they will interfere with investments by the “job creators” in economic growth. If capital should become as self-serving as Ford expects, with businesses increasing profits by destroying jobs rather than creating them, that argument should become less convincing. One wonders how high unemployment will have to go before people turn to the public sector for job creation, as they did in the 1930s.

A broader moral argument

Ford is concerned about growing inequality, and he does make the argument that as taxpayers who have supported basic technological research, people have a legitimate claim on technology’s benefits. I agree, but I would also ground popular rights in a more basic principle, the dignity of human labor. Let the machines do the work they can do better than people can. But respect people as more than just purchasers of what the machines provide. Help people be as creative as they can be as producers–paid and unpaid–as well as consumers.


Rise of the Robots (part 2)

May 23, 2017

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In Rise of the Robots, Martin Ford describes how smart machines are starting to replace human workers in more and more kinds of work, raising the threat of a “jobless future.” He sees no alternative but a government-guaranteed basic income to support the millions of people who will have trouble finding jobs.

Although I have described Ford’s outlook as bleak, I am not opposed to letting machines do the work they can do better and more efficiently than humans. Nor am I opposed to strengthening the social safety net to assist workers who are most hurt by this transformation. What I do want to suggest is that Ford’s focus on job destruction alone may miss some of the more positive possibilities of the information economy.

Where does displaced labor go?

In the late nineteenth and early twentieth centuries, the United States experienced a dramatic decline in farm jobs, as we transitioned from a predominantly agricultural society to an urban industrial society. That was a hardship for many former farmworkers, who had to move to the city and compete with other displaced workers for whatever wages they could get. The “Great Migration” of African Americans from the rural South and waves of mostly Southern and Eastern European immigrants heightened the competition and provoked racial and ethnic conflict.

Nevertheless, the situation did not result in protracted high unemployment. The expansion of manufacturing and service industries absorbed most of the displaced workers. In addition, a lot of human activity was shifted away from employment by shortening the work week, phasing out child labor, and encouraging retirement. The Fair Labor Standards Act of 1938 reduced the standard work week to 40 hours and established minimum wages and overtime pay for many workers. These measures distributed the available work more widely, while keeping incomes up. The expansion of leisure also helped create job opportunities in leisure industries such as travel.

Ford would say that the ways we have avoided high unemployment in the past are no longer relevant, since we now face worker displacement on a much larger scale. As an artificial intelligence expert, he is focused more on how machines will work than on how humans can create and distribute work for themselves. He is very imaginative when it comes to what robots might do, but less imaginative when it comes to how humans might adapt. He seems to be making a couple of simplifying assumptions: first, that there’s only a fixed amount of work to be done; and second, that whatever work remains for humans after the robots move in must be hogged by the few rather than shared by the many. If these assumptions are wrong, then the job outlook isn’t as bleak as he makes it out to be.

Will humans still work?

IBM used to have a slogan: “Machines should work; humans should think.” Now that the machines are getting smarter, that distinction is harder to defend. Martin Ford’s slogan might be: “Machines should work and think, and a lot of humans should just consume.”

That’s a little unfair however, since Ford himself acknowledges that computers think only in a very limited and specialized sense. “Even IBM’s Watson, perhaps the most impressive demonstration of machine intelligence to date, doesn’t come close to anything that might reasonably be compared to general, human-like intelligence. Indeed, outside the realm of science fiction, all functional artificial intelligence technology is, in fact, narrow AI.” Ford is also more reluctant than other computer scientists to assume that general machine intelligence is inevitable or even possible, or to speculate that robots will soon have the ability to rebel against their creators.

Some brilliant philosophers and scientists have questioned whether a dead machine could ever have the capabilities of any living organism, let alone a human one. (See, for example, Robert Rosen’s Life Itself.) Arguments for continuing to distinguish ourselves from machines are not confined to religious traditionalists or Cartesian dualists who look for an immaterial soul within an otherwise mechanical system. They are made by scientists like Stuart Kauffman, who have a less reductionist and mechanistic conception of nature itself.  Many thinkers reject the idea that the universe in general and human thought in particular is reducible to algorithm (computational procedure). Philosophers in the Whitehead tradition argue that each human experience is a unique creation that synthesizes a multitude of past experiences. We should be careful about extrapolating from what we know well–our own machines–to aspects of the natural world that remain deeply mysterious to us.

Granted that computers can simulate human work by detecting patterns in what humans have already done. That includes existing works of art. A computer has “already produced millions of unique compositions in the modernist classical style.” But humans invented that style by experiencing and expressing modernity. The human creative work is a synthesis and expression of lived experience. The machine simulation is a meaningless exercise because the dead machine has no lived experience to express.

Ford says that narrow intelligence is all that the machines need in order to do most human work, since “the tasks that occupy the majority of the workforce are, on some level, largely routine and predictable.” But maybe the reason why so many jobs have been routine and predictable is precisely because we haven’t had anyone besides humans to do the boring work until now. Now that we can automate more of what we’ve been doing, how do we know there isn’t some new frontier of creative activity for humans to explore?

The distribution of human work

Suppose Ford is correct that half of the existing work could be done by machines. We can still imagine the future economy in more than one way. At one extreme, half of the human workers keep their existing jobs, while the other half become unemployed. At the other extreme, the human work is distributed among the same number of human workers so that each works half as much as before. The benefits of the new technology are taken the same way they were in the twentieth century–in the form of higher productivity and more leisure.

Because Ford is focused on replacement of the human worker, he plays down the possibility of productive collaboration between human and machine. The machines are out to get your job, and if you work with them you will be helping them learn to do so. “If you find yourself working with, or under the direction of, a smart software system, it’s probably a pretty good bet that–whether you’re aware of it or not–you are also training the software to ultimately replace you.” But that is true only to the extent that the work is predictable, general intelligence is irrelevant, and the human touch is dispensable. Ford seems to vacillate between admitting that machines cannot do everything and talking as if they can.

A recent article in the New York Times was titled, “Meet the People Who Train the Robots (to Do Their Own Jobs).” It reported that some companies are asking their employees to train artificial intelligence systems to act more like humans. However, the workers who told their stories did not see their human role as very endangered. A travel agent who used A.I. to book hotels said, “It made me feel competitive, that I need to keep up and stay ahead of the A.I.”  Using the system “frees me up to do something creative.” A customer service rep who was training a system to answer customer questions said that “she doesn’t foresee a future where she’s out of a job. Too many questions still require a level of human intuition to know the appropriate answer. There are also times when rules need to be broken, like when customers ask for an extension on their account because of some circumstances beyond their control.” The executive who developed a system for searching and analyzing legal documents said that he “doesn’t think A.I. will put lawyers out of business, but it may change how they work and make money. The less time they need to spend reviewing contracts, the more time they can spend on, say, advisory work or litigation.” As for myself, I have been using technology all my professional life to become more creative and productive, and I have trouble imagining any occupation where such collaboration couldn’t occur.

If most occupations allow for both human and technological input, the benefits of that collaboration could appear in some combination of higher output and reduced work hours. As with the twentieth-century technological advances, many workers could produce more while working less, and that would spread the available work to more people. How exactly this would be accomplished in our time I don’t know. It probably would not be as simple as legislating a new standard work week. But if the alternative is mass unemployment and paying people not to work, I think society will find a way.

Productivity and income reconsidered

The potential for human-machine collaboration calls into question Ford’s most basic contention, that artificial intelligence is a worker replacement and not a tool for raising worker productivity. In the “golden age” of the American economy, “As the machines used in production improved, the productivity of the workers operating those machines likewise increased, making them more valuable and allowing them to demand higher wages.” But those days are gone, along with a big chunk of the labor force. Are they really, or is it that we have not yet seen the social changes that would translate new technological capacities into worker benefits? Perhaps we are living in a period like the 1920s, just after the introduction of the assembly line but before the New Deal regulated wages and hours and recognized labor’s right to organize.

I return to a fundamental economic problem I raised in the last post. If technology can make us richer in output, then why should people settle for being poorer in consumption? In Ford’s imagined world of massive unemployment, government taxes the winners to provide a basic income to the losers. In an alternative vision, workers are typically technologically assisted, highly productive, and employed fewer hours so that many can work. They can become better off in two ways: winning a fair share of the benefits of their own productivity, and consuming goods and services that have become less expensive. Recall that assembly-line technology led to both higher wages and less expensive cars, a win-win for ordinary people. As in the past people will have to fight for such gains, and they will have to use the tools of democracy to get government on their side.

Another possibility explored by some futurists, such as Jeremy Rifkin, is that people who spend less of their time in paid employment will use new technologies to create goods and services to share for free. (If you find that idea absurd, you can start paying me for my posts right now!) The abundance of goods and services produced in the “collaborative commons” could reduce people’s need for money, softening the economic impact from reducing paid work hours.

In my final post on this book, I’ll explore possibilities for creating new jobs that robots are unlikely to do.

Continued


Rise of the Robots

May 22, 2017

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Martin Ford. Rise of the Robots: Technology and the Threat of a Jobless Future. Philadelphia: Basic Books, 2015.

Here is a book whose title sums it up pretty well. The robots are coming to a workplace near you, and by the time they take over, a large portion of the workers will be out of a job. That may soon invalidate one of the cardinal assumptions of industrial capitalism, that people make a living through employment. How then will they live, and how will they continue to participate in economic consumption? In Ford’s view, millions will have to rely on a basic income guaranteed by the government. They will get “enough to get by, but not enough to be especially comfortable.”

I will say at the outset that I find this to be a pretty bleak vision of the future, although that in itself does not make it wrong. I will explore some doubts I have about Ford’s vision later. But first I’ll take a closer look at his argument.

The decline of the “golden age”

Once upon a time, back in the twentieth century, “the American economy was characterized by a seemingly perfect symbiosis between rapid technological progress and the welfare of the American workforce.” New technologies like the assembly line raised worker productivity, allowing for higher wages, higher spending, and higher demand for mass-produced goods and services. That kept the system going in a “virtuous feedback loop.” Ford makes the connection sound a little too technologically-determined and automatic for my taste, overlooking how hard workers had to fight to obtain a decent share of their rising output. Nevertheless, the country did finally achieve a positive connection between industrial technology and mass prosperity.

Ford believes that information technology breaks that connection. The new machines are not just tools that make workers more productive; they are potential replacements for the workers themselves. Robots empower capital (their owners), not labor. Ford sees evidence of this in a number of recent economic trends: Wages have been stagnating; labor’s share of national income has been declining; labor force participation has been falling; job creation has slowed to a crawl; income inequality has soared; and even college graduates are increasingly underemployed.

Other factors have aggravated the situation: offshoring of manufacturing jobs, growth of the financial sector and consumer debt, and political policies that favor capital over labor. But the development of information technology is the trend with the biggest potential to shape the future, because of its continuing exponential growth.

Automation and job destruction

Ford cites research to support the claim that “nearly 50 percent of jobs will ultimately be susceptible to full machine automation.”  Manufacturing jobs are prime candidates, but the transformation will hardly end there. In the more developed economies, automation will also overhaul the service sector, where most workers now work. Retail workers will be replaced by online sellers, intelligent vending machines, and robotic sales staffs. Robots will be preparing and serving fast food.

As the machines become smarter, they will threaten jobs up and down the job ladder. Ford does not expect that the workers displaced at the bottom will find expanding opportunities at some higher level, which was often the case in the last century. Instead he emphasizes the potential of smart machines to take over the more predictable tasks at many levels, including tasks that have required mental skills and a fair amount of education. Computers are now using vast amounts of data to make decisions, solve problems, and even to modify their own procedures through trial and error learning. They are helping to diagnose diseases, dispense pharmaceutical products, provide customer service, prepare financial plans, and serve as personal assistants to managers. That puts many white-collar jobs at risk.

The conventional wisdom that people can find jobs as long as they get a good education may no longer be true:

We are running up against a fundamental limit both in terms of the capabilities of the people being herded into colleges and the number of high-skill jobs that will be available for them if they manage to graduate. The problem is that the skills ladder is not really a ladder at all: it is a pyramid, and there is only so much room at the top….And because artificial intelligence applications are poised to increasingly encroach on more skilled occupations, even the safe area at the top of the pyramid is likely to contract over time.

Economic polarization

Economists have observed a process of “job market polarization” in which middle-class jobs are destroyed and replaced with “a combination of low-wage service jobs and high-skill, professional jobs that are generally unattainable for most of the workforce.” The automation of a middle-class job can save the employer more in wages than automation of a low-wage job. Eventually, automation will become cheap enough so that even workers who are willing to work for little may have trouble competing with the robots.

Ford expects the information economy to be largely a “winner-take-all” economy. Those who own and manage the robots will have a great advantage over workers who are competing for a dwindling supply of jobs. The winners will also include the companies that control the centralized computing hubs that provide data and software to the machines, as well as the principal producers of digital content for mass audiences. A few star performers can stream most of the music people want to listen to, and a few renowned scholars can stream online courses to masses of college students. The biggest losers will be those who can neither compete with nor find employment with the centralized providers of information.

As a software developer and expert on artificial intelligence, Ford is in the awkward position of both advancing the new technology and warning of its disruptive potential. His concerns about increasing economic polarization are both moral and practical. Since citizens as taxpayers have supported much of the basic research in information technology, they may have a legitimate claim on its benefits. And as a practical economic matter, a productive and innovative economy requires consumers with the purchasing power to buy the goods and services being produced. If automation breaks the link between production and consumption (robots produce, but people have to consume), how will the economy function to deliver products to consumers and buyers to sellers? “Continued progress depends on a vibrant market for future innovations–and that, in turn, requires a reasonable distribution of purchasing power.”

Ford suggests a thought experiment in which millions of workers are displaced, unemployment rises, wages fall, mass purchasing power declines, and mass-production industries fail. He also imagines, with the help of some science fiction writers, a “techno-feudal” scenario in which the economy is increasingly geared toward producing luxuries for the super-rich, who maintain a “robot-enforced tyranny” to keep the unemployed masses from overthrowing the system. It’s not a pretty picture.

A basic income guarantee

Ford’s main proposal for preventing such scenarios is a basic income guaranteed by the government. It would appeal to liberals on humanitarian and social justice grounds, and it would appeal to conservatives as a minimal intrusion by government into the market economy. It could be funded partly by eliminating other social programs, like food stamps and housing assistance. It could also pay for itself to a degree by promoting economic growth and tax revenue. It would be kept deliberately low, so that people unable to find work could meet their essential needs, while people able to work would still have an incentive to do so.

As Ford notes, proposals such as his have been around for a long time and have received support from liberals and conservatives alike, although never enough to be adopted in the United States. If high unemployment becomes as chronic as Ford expects, a strengthening of the social safety net along these lines might be necessary. But having said that, I am not sure that it is enough to relieve what is essentially a bleak view of our future. The economy he describes would still be polarized between winners and losers, with masses of the losers deprived of rewarding work.  The middle class would still be hollowed out, which many social analysts regard as bad news for democracy.

I also have questions about whether his proposal would even work to stabilize a highly automated economy. One thing that bothers me about Ford’s economic vision is that he never clearly says whether his future society will be richer or poorer in per-capita production and consumption. One would certainly hope that putting millions of smart machines to work would add to a country’s productive capacity. Why then should millions of people tolerate being reduced to a minimal income, especially if many of them are former middle-class workers who lost their jobs to machines? Even with Ford’s guaranteed income in the equation, falling incomes could fail to balance rising production, forcing society to give up much of the potential benefit of the technological revolution. There is also the political problem of how to contain the social dissatisfaction resulting from the gap between rising expectations and disappointing results, which brings us back to techno-feudalism and social repression.

With these concerns in mind, I will go on to ask whether the robotic revolution has some more positive possibilities that Ford may be overlooking.

Continued

 

 


Glass House (part 3)

April 6, 2017

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The “1% economy”

Brian Alexander’s book Glass House is subtitled “The 1% Economy and the Shattering of the All-American Town.” Alexander is a journalist, not a macroeconomist, and he doesn’t attempt much analysis of the economy as a whole. Nevertheless, he seems sure that the brand of capitalism we have been practicing lately is largely responsible for Lancaster’s decline.

Alexander suggests that owners and investors have more than one route to profit: “You can increase profits by building value through research and development, creating new products, investing in plants and equipment. But that takes time….Instead, you can also increase company profit by making the same products with the same sales volumes, but cutting expenses.” Which route is chosen dramatically affects people’s lives: “If you were the target company employee, or a small town where that company was located, you might prefer to add value through investment in people, machines, and research and development, for a long-term benefit.”

I didn’t see anywhere in the book where Alexander explained how this choice is affected by the general nature of the “1% economy,” but I’ll offer a few thoughts. Two features of the 21st-century US economy thus far are extreme economic inequality and sluggish economic growth. (Some would say the two are related, although the relationship may not be simple.) The wealthy minority have a lot of capital available to invest. But very weak income growth for the majority limits their ability to spend on new products. Under those conditions, it is not surprising that a lot of capital would go to buy existing enterprises rather than create new ones; nor is it surprising that cost-cutting rather than expansion of production would be a favored route to profit. If this strategy works to make the 1% richer despite hollowing out the middle class, that only reinforces the inequality and sluggish growth, creating a vicious cycle.

Ideological responses

The workers and townspeople who are the victims of economic decline have little knowledge of macroeconomics or high finance. Without understanding the underlying causes, they react to the symptoms they see–the wage concessions, the layoffs, the family instability, the reduced commitment to work, the drug problem and the crime. They try to interpret what they see within a traditional belief system linking hard work, self-reliance, economic success and strong families. If more people are failing, well, that must be due to some mysterious decline in personal responsibility and achievement.

Like many Midwestern small towns, Lancaster, Ohio had always been at least moderately conservative. But as economic conditions deteriorated, “A significant faction within Lancaster lost its moderate conservatism. Stoked by cable news, internet videos, and right-wing politicians, they insisted that most of Lancaster’s problems had to be the natural product of an over-generous social service system that coddled lazy, irresponsible people.” Few stopped to consider what work ethic the high-flying financiers were living by when they made millions off of other people’s misfortunes.

Dependency on government was increasing in two ways: direct assistance through programs like food stamps and Medicaid (whose expansion under Obamacare Ohio chose to implement), and reliance on public money to create jobs. “Medicaid and Medicare supplied over 60 percent of the hospital’s income. The public schools were the second-largest employer in town.” Glass-maker Anchor Hocking had dropped to third. But the increasing dependency was accompanied by denial or resentment.

A certain kind of racism was entangled with popular attitudes toward the needy, but Alexander is careful to qualify it. It was more complicated than a simple prejudice against people who looked and acted different. It was more the resentment of struggling whites against any suggestion that people of color deserved more help than they did, or the idea that one group should have to bear the costs of some other group’s failures. It was easier to direct hostility across racial lines than to identify the shadowy financial interests and economic forces that were really responsible for their problems. “Somebody, they thought, was screwing them out of the good-life lottery. Somebody was screwing them. It just wasn’t who they thought.”

Political fallout

The political leaders of Lancaster and many of its higher-income residents were Republicans. Alexander describes them as having an anti-tax philosophy that kept them from raising the money to maintain the town’s infrastructure and institutions. They also had a “pro-business bias [that] blinded them to how Newell and Cerberus [new owners of the glass company] picked their pockets.”

The blue-collar workers of Lancaster were more likely to vote Democratic, if they voted at all. But they were turned off by the Party’s preoccupation with the rights of minorities like African Americans and gay people.

In 2012, Fairfield County, where Lancaster was located, voted 57% for Romney, although Ohio went narrowly for Obama. In 2016, the county went 60% for Trump, helping turn the state red again.  The great irony here is that by voting for Romney and Trump, the people of Lancaster were casting their lot with the kind of financial wheelers and dealers Alexander holds responsible for the town’s decline.

Donald Trump promised the downwardly mobile workers of towns like Lancaster to “make America great again.” What those workers couldn’t acknowledge was that “buccaneering free-market finance” had done so much to undermine that greatness. It was so much easier to blame “sin, laziness, scientists, immigrants, unions, and any number of other enemies of the American Way.” Trump cleverly combined populist anger with right-wing conservatism. The good manufacturing jobs would come back if the government would defend the borders, make tougher trade deals with other countries, and lighten the tax and regulatory burden on business. Trump shared Romney’s admiration for the wealthy as the job creators. What was missing from his critique was any suggestion that they might be investing the country’s wealth unwisely.

Alexander does not discuss the 2016 election, but I think he would agree that it does not portend a reversal of fortunes for towns like Lancaster. What I fear it does is add a layer of political exploitation to the economic exploitation that has already occurred.


Glass House (part 2)

April 5, 2017

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Yesterday I gave an overview of Brian Alexander’s Glass House, his story of the economic decline of Lancaster, Ohio. Today I will fill in some of the details about the decline of its principal employer, the Anchor Hocking glass company.

First, a word of caution. The financial wheeling and dealing that helped bring down Anchor Hocking is very complicated and sometimes shrouded in secrecy. Alexander is not an economist or CPA, so he has to rely primarily on the stories told by his informants to make sense of it all. What he does have going for him is that he is a good journalist, he digs deep into the information available to him, and he knows the town of Lancaster well, having grown up there himself. Ultimately, we cannot know what would have happened to businesses like Anchor Hocking if they hadn’t been targeted by other companies as sources of quick profits. However, I think Alexander makes a pretty good case that the leveraged buyouts and revolving door of owners did more harm than good.

Newell

The first company to acquire Anchor Hocking in a leveraged buyout (in 1987) was Newell Corporation, a maker of household goods like window shades and hardware. The good news is that Newell’s management “introduced a few needed modern efficiencies and systems that Anchor Hocking had neglected–like data and accounting techniques, order tracking, customer service methods.” They succeeded for a time in making Anchor Hocking more profitable. On the downside, they sold off some parts of the company and eliminated an important segment of Lancaster’s leadership by bringing in outside executives who didn’t reside in the town. They persuaded local authorities to take money away from public schools in order to finance tax breaks. They were also harder on workers, eliminating training opportunities and quickly firing those who didn’t hit performance targets.

The larger problem was that Newell was becoming financially overextended because of its continuing acquisitions. Its merger with Rubbermaid in 1999 “nearly killed the company,” because Rubbermaid was in such bad shape and the deal left Newell with such a debt burden. Newell no longer wanted to put any money into Anchor Hocking for maintenance or improvements. It sold off the company in 2004, one year after getting the tax breaks from the town.

Cerberus

Anchor Hocking’s next owner was the private equity firm Cerberus. Its business was buying and selling companies, not manufacturing as such.  Here things get a little complicated. Cerberus formed a new company, Global Home Products Investors, LLC, to buy Anchor Hocking and two other businesses from Newell. Global Home Products borrowed most of the money it needed to make the buys, meaning that it and not Cerberus bore the cost of the acquisitions. To make things more confusing, it borrowed a lot of the money from a Cerberus affiliate, so that Cerberus made money by lending to GHP, its own creation. That also meant that “Anchor’s cash flow wound up supporting the structure of Global Home Products [and ultimately Cerberus], and because of that it starved.”

Anchor was still profitable, but GHP’s need to get money out without putting much in soon began to hurt the company. Maintenance was neglected; quality suffered; cash flow deteriorated; and the retirement plan was underfunded. After a while Anchor Hocking wasn’t even paying some of its suppliers. In 2007, after only two years in business, Global Home Products filed for bankruptcy. The bankruptcy proceedings were contentious, but in the end GHP’s lenders got paid, while the pension plan lost millions and retirees lost medical benefits.

“Meanwhile, Cerberus continued to thrive. As of mid-2016, Cerberus was one of the largest private equity firms in the world, with more than $30 billion under management, and [founder and manager] Stephen Feinberg was named as one of Donald Trump’s key economic advisers.” Trump, of course, also knows something about continuing to thrive while taking his acquisitions into bankruptcy.

Monomoy

As a result of GHP’s bankruptcy, Anchor Hocking was sold at auction to the sole bidder, Monomoy Capital Partners. That was an investment fund controlled by the private equity firm Monomoy. As with the Cerberus deal, the purchase was made with mostly borrowed money. The deal was structured so that the debt was incurred by Anchor Hocking rather than by Monomoy.

Monomoy’s intention was to manage Anchor Hocking for a couple of years and then sell it at a profit. Most of what Monomoy did “followed the standard private equity playbook: jawbone the unions, cut costs even at the price of damaging longer-term success, do a sale-leaseback of real property assets, take whatever public money you can get from communities eager to save their industries…and collect fees.” The sale-leaseback occurred when Monomoy sold Anchor Hocking’s distribution center for a quick $23 million, a “shortcut to make the company look profitable, though at the price of a twenty-year lease.”

Before Monomoy could sell Anchor Hocking, the financial crisis intervened, discouraging lending and putting a chill on leveraged buyouts.  Still stuck with a company it didn’t want to keep, Monomoy took cash out in 2009 by resorting to a “dividend recapitalization.” “Monomoy had Anchor Hocking borrow $45 million. Anchor then paid Monomoy Capital Partners, LP, $30.5 million as a dividend.”

In 2012, Monomoy merged Anchor Hocking with Oneida, another troubled company that it owned, naming the combined company EveryWare Global. In 2013, Monomoy sold a minority share of EveryWare Global to a special purpose acquisition company controlled by the Clinton hedge fund. Most of the money for this purchase was also borrowed, and that too became part of EveryWare’s debt. At this point, “EveryWare Global was drowning in over $400 million in liabilities. It possessed just over $100 million in total assets.”

As the excessive debt strained EveryWare’s cash flow, Monomoy threatened to shut down Anchor Hocking unless the union agreed to a deal: Monomoy would give the company a cash infusion of $20 million, but the workers would accept lower wages, an end to company contributions to retirement plans, and higher insurance premiums. The unions accepted the ultimatum in the summer of 2014. Despite those concessions, EveryWare declared bankruptcy in 2015. This time, the lenders took over the company. They appointed a “turnaround board” of bankers and other glass industry outsiders to fix up the company for sale, like a rundown house.

The losses were hardly distributed evenly. Alexander concludes:

From the standpoint of a private equity firm, it was a success. Like a lucky old lady hitting a slot in Reno, Monomoy put a little money in and pulled a wagonload of money out.
….
Monomoy sent what was left of Lancaster’s once-grand, 110-year-old employer into bankruptcy court while it made off with millions and the employees walked their wages and benefits backwards in time. Lancaster’s social contract had been smashed into mean little shards by the slow-motion terrorism of pirate capitalism.

Continued