7 ms·

America Is Getting a Raise, and Goldman Sachs Is Freaking Out About It

96 points by anchpop 9y ago

crimsonalucard 9y ago
They shouldn't be afraid. When the middle class prospers everyone prospers. It's counter intuitive, but there is a simple logic behind why this type of mindless quest for profit is actually self destructive: Businesses can not thrive when they pay the middle class a salary that does not allow them to buy stuff from said businesses.
- tim333 9y ago
  People can the afraid of different things - the worry in the article would seem to be that stock prices will fall as margins go down which seems quite possible. At the same time life in general may be just fine.
  - macawfish 9y ago
    It's wild to read spam propaganda articles on websites like NewsMax that link the stock market crashing to "apocalypse". IMO, parts of the market desperately need to deflate if we want to avoid unhealthy climate change. In other words, some market collapse is necessary to avoid actual apocalypse.
- mac01021 9y ago
  I never understood that logic. If all of your revenue is from sales to your own employees, fueled by the wages that you're paying them, then your business is, by definition, not incurring a profit. Maybe that's fine if you're like a farming coop or something, but it certainly isn't going to get anyone to invest in your enterprise.
  - crimsonalucard 9y ago
    Of course businesses shouldn't sacrifice all of their revenue. Consumers are largely employees of businesses. If consumers do not have money to buy things from businesses then everyone loses. Instead of engaging on a senseless endeavor to lower wages as much as possible, strive for a FAIR wage that will allow consumers to do business with businesses.
  - selllikesybok 9y ago
    You can absolutely underpay your employees, sell goods to employees of others firms who do not, and profit. There is a clear benefit to a single company doing this. It is not clear the benefit is greater than increasing wages, but that's another thing. But if everyone does this, to the point that there are not enough potential consumers for the majority of products, then there is no benefit to lowering wages. You can't sell anything to anyone. In the end, no one wins the race to the bottom.
    - Broken_Hippo 9y ago
      I came to say the same thing.
    - syockit 9y ago
      Parent post is not arguing about underpaying, but the feasibility of increasing wages. The idea is that if we treat all companies and their employees as one grand company, then the company will have to sell everything to its employees in order to get revenue, but that revenue will have to be distributed to the employees as wages, in full, in order for everything to be bought. That leaves no margin for profit. The answer to the question lies in what is missing from the equation: the existence of stockholders. They are potential customers too. You don't need to sell everything to just employees, that means you can underpay them and still be sustainable as long as stockholders buy things too. But there are limits to how many things a customer wants to buy. Once the stockholders' needs are satiated, the rest of the profit won't be spent. At that point, in order for businesses to be sustainable, this balance has to be redistributed as increase in wages.
    - mac01021 9y ago
      This sounds kind of like one of those games where the Nash equilibrium leaves everyone with fewer points than they'd get if they all cooperated in the right way. There may be something to that. I have to say, though, paying my employees more so that my competitors have to pay their employees more so that their employees will buy more stuff from me sounds like a pretty dubious business strategy. And one that certainly won't work at all if there's enough of a labor surplus, because my competitors can keep their wages low and still find employees even if I'm paying an order of magnitude more.
  - deleted 9y ago
    [deleted]
  - throwaway2048 9y ago
    The thing you are missing is that money spent isnt thrown into a black hole, its spent again, and again, and comes back to you several times. The economy does not function like a household budget.
    - mac01021 9y ago
      Say my profit margin is 5%. I could pay my employee an extra dollar, but that dollar has to come back to me 20 times for the pay raise to have been worth it. Is that really going to happen?
allan_golds 9y ago
Non closable "open in app" pop-up.
throwaway_srb 9y ago
Is this what happens when someone reads a sell side report for the first time? The author is having a fit merely over choice of words in the GS report. The GS analysts aren't passing a moral judgement as to whether rising wages are a good thing or a bad thing. They are merely pointing out that current stock market valuations are baking in a corporate profit margin that may not hold in the face of rising wages. That's it.
- cmonfeat 9y ago
  This was my take away too. Objectively, a decreasing gap between wages and productivity probably is a threat to corporate profits. Reasonable people can disagree about the importance of that threat vs the well being of American workers, but the writer seemed to miss that that was not the point of the Goldman report.
  - washadjeffmad 9y ago
    The question is of the GS report's intent. Was it merely so they could make plans to adapt to this new inevitability or a subtle call to address the issue by prevention, perhaps by shortchanging US workers in other ways? It's not wrong that this is raising eyebrows when the interpretation has yet to be proved. I'd say the point of the reporter's report was what the GS report pointedly did not report.
    - traek 9y ago
      > or a subtle call to address the issue by prevention, perhaps by shortchanging US workers in other ways This is ridiculous. It's an equity research report, the intent is clearly to report on the equities market. Who would this even be a subtle call to? There is no cabal of capitalist overlords who are out to shortchange workers. This is like saying a research report about a threat to e.g. Coke's EMEA sales because of political instability might be a "subtle call" for Western governments to recolonize the African continent.
- mcphage 9y ago
  > The GS analysts aren't passing a moral judgement as to whether rising wages are a good thing or a bad thing. Yes, they absolutely are. By calling rising wages a "threat", and a "sobering thought", they are passing clear moral judgement on it. Those are not value-neutral terms. If you can't see that, spend some time on improving your reading comprehension skills and come back to it.
Eridrus 9y ago
I've long wondered how productivity is measured, so I went and found the study these graphs are from: http://www.epi.org/publication/understanding-the-historic-divergence-between-productivity-and-a-typical-workers-pay-why-it-matters-and-why-its-real/ http://www.epi.org/publication/understanding-the-historic-di... A few things were interesting: a) Productivity is measured as roughly GDP/hours worked (with some tweaking) b) The biggest chunk of the gap is income inequality. The graph that gets used is for average non-supervisory worker in the private sector. The graph looking at all workers is much closer. c) The second biggest is that consumer goods are more expensive relative to what workers are producing. The term of art seems to be "terms of trade" d) The third biggest is more returns to capital, ergo profits, was the smallest, only contributing 8.9% of the difference; they note that this part is hard to measure, but the sources of error they describe are unlikely to bump this up beyond 10% === At the end of the paper they rebut some common arguments and a section I found particularly interesting was titled "Individuals’ productivity cannot be inferred from industry trends" about why using industry-level productivity statistics is a bad idea. Which pretty much argues that actual productivity is not important because worker's salaries will not rise in more productive industries. They bring up Baumol’s law/cost disease to explain why there is a decorrelation between sector productivity and pay, and I guess this also ties into the "terms of trade" issue. Your barber is no more productive than he would have been 100 years ago, but now he needs to be compensated at a level that makes it worthwhile for him to do it. === Looking at this, I don't really come away more convinced that what economists call productivity is what lay people would call productivity. Or that measuring "average productivity" in this way makes particular sense, rather than just being a convenient and available metric. I also find the graph they use misleading since what that graph is largely (implicitly) showing is that wage gains have not been evenly distributed, but it implies something different. === They have a whole other paper on what they see as policy issues that lead to this (globalization, minimum wage stagnation, fall of unions, economic rents to CEOs) and their recommendations: http://www.epi.org/publication/raising-americas-pay/ http://www.epi.org/publication/raising-americas-pay/
- BoiledCabbage 9y ago
  This was a great link, thanks for sharing. One of the better links I've seen on here in a while for understanding what's been going on. Out of curiosity, could you explain more on how you found that one graph misleading? I didn't see it that way - but didn't follow your reasoning.
mnm1 9y ago
"Does Goldman Sachs value a small sliver of profit over the opportunity to create a sustainable economy that works for everyone?" Duh! Not just Goldman but pretty much every corporate entity out there. The irony is that corporations like Goldman Sachs do not have to exist. The sad part is that our society not only allows them to exist, but encourages them at the expense of real people's lives. One day, people might be smart enough to realize we have a choice, that we don't have to let these amoral entities dictate our lives. Oh, who am I kidding? People are too stupid for them to see what's literally happening in front of their eyes.
- devoply 9y ago
  Replace the financial class with AI.
  - mnm1 9y ago
    Or just a plain old CRUD app because intelligence is not required in this field.
  - gumby 9y ago
    Which is under way. Look at companies like Two Sigma, whose assets under management have ballooned over the last few years as people yank their assets out of human-managed funds.
- mythrwy 9y ago
  I've been watching the series "Taboo" recently (really enjoying, great series). East India Tea Company is a major feature of the show. While watching I kind of wondered if it would fair to think of Goldman Sachs as sort of a modern incarnation of East India Tea Company (minus the actual trading in hard goods of course).
  - dwd 9y ago
    It was the East India Company (a multinational corporate) who owned the tea thrown overboard in Boston and in very very simple terms the whole affair was basically over taxes put in place to bail them out. Sound familiar? The modern corporate like Goldman Sachs however doesn't have its own standing army and navy. They use their power and influence to cause governments to do the dirty work for them. To quote Friedman - "McDonald's cannot flourish without McDonnell Douglas, the designer of the F-15." I'd recommend this if you're interested in reading more on their history: https://www.amazon.com/Corporation-That-Changed-World-Multinational/dp/0745325238 https://www.amazon.com/Corporation-That-Changed-World-Multin...
wdb 9y ago
If I understand this correctly it would be better for GS to lower it employees wages 3% yoy so the profits will go up. What about lowering the bonuses will that help with the profits too?
- traek 9y ago
  You definitely don't understand this correctly because it's not about what GS is paying their employees, but rather wage growth in America as a whole.
  - wdb 9y ago
    Yes, I am aware this is about wage growth in America which affects the profits of major companies in America. I think you got my point, though
gumby 9y ago
It's such a short term, zero-sum view. Higher salaries increase the velocity of money in the system (each iteration of which is an opportunity for you to do some cream-skimming, Goldman Sachs) and improving the total operational efficiency of the system is what yields profit, so providing workers with better benefits does, in aggregate, improve output. All of which analysts would know if the industry tried to hire analysts with operational experience!
robocat 9y ago
Hard to take article seriously with such a misleading comparison between graphs: productivity was shown on a log scale, and corporate profits on a linear scale...
segmondy 9y ago
Old news, 4/2017 "Labor is being paid first again" - citi http://www.salon.com/2017/04/28/labor-is-being-paid-first-again-american-airlines-investors-complain-after-company-gives-pilots-and-flight-attendants-raises/ http://www.salon.com/2017/04/28/labor-is-being-paid-first-ag...

96 points by anchpop 9y ago

They shouldn't be afraid. When the middle class prospers everyone prospers. It's counter intuitive, but there is a simple logic behind why this type of mindless quest for profit is actually self destructive: Businesses can not thrive when they pay the middle class a salary that does not allow them to buy stuff from said businesses.

tim333 9y ago
People can the afraid of different things - the worry in the article would seem to be that stock prices will fall as margins go down which seems quite possible. At the same time life in general may be just fine.
- macawfish 9y ago
  It's wild to read spam propaganda articles on websites like NewsMax that link the stock market crashing to "apocalypse". IMO, parts of the market desperately need to deflate if we want to avoid unhealthy climate change. In other words, some market collapse is necessary to avoid actual apocalypse.
mac01021 9y ago
I never understood that logic. If all of your revenue is from sales to your own employees, fueled by the wages that you're paying them, then your business is, by definition, not incurring a profit. Maybe that's fine if you're like a farming coop or something, but it certainly isn't going to get anyone to invest in your enterprise.
- crimsonalucard 9y ago
  Of course businesses shouldn't sacrifice all of their revenue. Consumers are largely employees of businesses. If consumers do not have money to buy things from businesses then everyone loses. Instead of engaging on a senseless endeavor to lower wages as much as possible, strive for a FAIR wage that will allow consumers to do business with businesses.
- selllikesybok 9y ago
  You can absolutely underpay your employees, sell goods to employees of others firms who do not, and profit. There is a clear benefit to a single company doing this. It is not clear the benefit is greater than increasing wages, but that's another thing. But if everyone does this, to the point that there are not enough potential consumers for the majority of products, then there is no benefit to lowering wages. You can't sell anything to anyone. In the end, no one wins the race to the bottom.
  - Broken_Hippo 9y ago
    I came to say the same thing.
  - syockit 9y ago
    Parent post is not arguing about underpaying, but the feasibility of increasing wages. The idea is that if we treat all companies and their employees as one grand company, then the company will have to sell everything to its employees in order to get revenue, but that revenue will have to be distributed to the employees as wages, in full, in order for everything to be bought. That leaves no margin for profit. The answer to the question lies in what is missing from the equation: the existence of stockholders. They are potential customers too. You don't need to sell everything to just employees, that means you can underpay them and still be sustainable as long as stockholders buy things too. But there are limits to how many things a customer wants to buy. Once the stockholders' needs are satiated, the rest of the profit won't be spent. At that point, in order for businesses to be sustainable, this balance has to be redistributed as increase in wages.
  - mac01021 9y ago
    This sounds kind of like one of those games where the Nash equilibrium leaves everyone with fewer points than they'd get if they all cooperated in the right way. There may be something to that. I have to say, though, paying my employees more so that my competitors have to pay their employees more so that their employees will buy more stuff from me sounds like a pretty dubious business strategy. And one that certainly won't work at all if there's enough of a labor surplus, because my competitors can keep their wages low and still find employees even if I'm paying an order of magnitude more.
- deleted 9y ago
  [deleted]
- throwaway2048 9y ago
  The thing you are missing is that money spent isnt thrown into a black hole, its spent again, and again, and comes back to you several times. The economy does not function like a household budget.
  - mac01021 9y ago
    Say my profit margin is 5%. I could pay my employee an extra dollar, but that dollar has to come back to me 20 times for the pay raise to have been worth it. Is that really going to happen?

allan_golds 9y ago

Non closable "open in app" pop-up.

throwaway_srb 9y ago

Is this what happens when someone reads a sell side report for the first time? The author is having a fit merely over choice of words in the GS report. The GS analysts aren't passing a moral judgement as to whether rising wages are a good thing or a bad thing. They are merely pointing out that current stock market valuations are baking in a corporate profit margin that may not hold in the face of rising wages. That's it.

cmonfeat 9y ago
This was my take away too. Objectively, a decreasing gap between wages and productivity probably is a threat to corporate profits. Reasonable people can disagree about the importance of that threat vs the well being of American workers, but the writer seemed to miss that that was not the point of the Goldman report.
- washadjeffmad 9y ago
  The question is of the GS report's intent. Was it merely so they could make plans to adapt to this new inevitability or a subtle call to address the issue by prevention, perhaps by shortchanging US workers in other ways? It's not wrong that this is raising eyebrows when the interpretation has yet to be proved. I'd say the point of the reporter's report was what the GS report pointedly did not report.
  - traek 9y ago
    > or a subtle call to address the issue by prevention, perhaps by shortchanging US workers in other ways This is ridiculous. It's an equity research report, the intent is clearly to report on the equities market. Who would this even be a subtle call to? There is no cabal of capitalist overlords who are out to shortchange workers. This is like saying a research report about a threat to e.g. Coke's EMEA sales because of political instability might be a "subtle call" for Western governments to recolonize the African continent.
mcphage 9y ago
> The GS analysts aren't passing a moral judgement as to whether rising wages are a good thing or a bad thing. Yes, they absolutely are. By calling rising wages a "threat", and a "sobering thought", they are passing clear moral judgement on it. Those are not value-neutral terms. If you can't see that, spend some time on improving your reading comprehension skills and come back to it.

Eridrus 9y ago

I've long wondered how productivity is measured, so I went and found the study these graphs are from: http://www.epi.org/publication/understanding-the-historic-divergence-between-productivity-and-a-typical-workers-pay-why-it-matters-and-why-its-real/ http://www.epi.org/publication/understanding-the-historic-di... A few things were interesting: a) Productivity is measured as roughly GDP/hours worked (with some tweaking) b) The biggest chunk of the gap is income inequality. The graph that gets used is for average non-supervisory worker in the private sector. The graph looking at all workers is much closer. c) The second biggest is that consumer goods are more expensive relative to what workers are producing. The term of art seems to be "terms of trade" d) The third biggest is more returns to capital, ergo profits, was the smallest, only contributing 8.9% of the difference; they note that this part is hard to measure, but the sources of error they describe are unlikely to bump this up beyond 10% === At the end of the paper they rebut some common arguments and a section I found particularly interesting was titled "Individuals’ productivity cannot be inferred from industry trends" about why using industry-level productivity statistics is a bad idea. Which pretty much argues that actual productivity is not important because worker's salaries will not rise in more productive industries. They bring up Baumol’s law/cost disease to explain why there is a decorrelation between sector productivity and pay, and I guess this also ties into the "terms of trade" issue. Your barber is no more productive than he would have been 100 years ago, but now he needs to be compensated at a level that makes it worthwhile for him to do it. === Looking at this, I don't really come away more convinced that what economists call productivity is what lay people would call productivity. Or that measuring "average productivity" in this way makes particular sense, rather than just being a convenient and available metric. I also find the graph they use misleading since what that graph is largely (implicitly) showing is that wage gains have not been evenly distributed, but it implies something different. === They have a whole other paper on what they see as policy issues that lead to this (globalization, minimum wage stagnation, fall of unions, economic rents to CEOs) and their recommendations: http://www.epi.org/publication/raising-americas-pay/ http://www.epi.org/publication/raising-americas-pay/

BoiledCabbage 9y ago
This was a great link, thanks for sharing. One of the better links I've seen on here in a while for understanding what's been going on. Out of curiosity, could you explain more on how you found that one graph misleading? I didn't see it that way - but didn't follow your reasoning.

mnm1 9y ago

"Does Goldman Sachs value a small sliver of profit over the opportunity to create a sustainable economy that works for everyone?" Duh! Not just Goldman but pretty much every corporate entity out there. The irony is that corporations like Goldman Sachs do not have to exist. The sad part is that our society not only allows them to exist, but encourages them at the expense of real people's lives. One day, people might be smart enough to realize we have a choice, that we don't have to let these amoral entities dictate our lives. Oh, who am I kidding? People are too stupid for them to see what's literally happening in front of their eyes.

devoply 9y ago
Replace the financial class with AI.
- mnm1 9y ago
  Or just a plain old CRUD app because intelligence is not required in this field.
- gumby 9y ago
  Which is under way. Look at companies like Two Sigma, whose assets under management have ballooned over the last few years as people yank their assets out of human-managed funds.
mythrwy 9y ago
I've been watching the series "Taboo" recently (really enjoying, great series). East India Tea Company is a major feature of the show. While watching I kind of wondered if it would fair to think of Goldman Sachs as sort of a modern incarnation of East India Tea Company (minus the actual trading in hard goods of course).
- dwd 9y ago
  It was the East India Company (a multinational corporate) who owned the tea thrown overboard in Boston and in very very simple terms the whole affair was basically over taxes put in place to bail them out. Sound familiar? The modern corporate like Goldman Sachs however doesn't have its own standing army and navy. They use their power and influence to cause governments to do the dirty work for them. To quote Friedman - "McDonald's cannot flourish without McDonnell Douglas, the designer of the F-15." I'd recommend this if you're interested in reading more on their history: https://www.amazon.com/Corporation-That-Changed-World-Multinational/dp/0745325238 https://www.amazon.com/Corporation-That-Changed-World-Multin...

wdb 9y ago

If I understand this correctly it would be better for GS to lower it employees wages 3% yoy so the profits will go up. What about lowering the bonuses will that help with the profits too?

traek 9y ago
You definitely don't understand this correctly because it's not about what GS is paying their employees, but rather wage growth in America as a whole.
- wdb 9y ago
  Yes, I am aware this is about wage growth in America which affects the profits of major companies in America. I think you got my point, though

gumby 9y ago

It's such a short term, zero-sum view. Higher salaries increase the velocity of money in the system (each iteration of which is an opportunity for you to do some cream-skimming, Goldman Sachs) and improving the total operational efficiency of the system is what yields profit, so providing workers with better benefits does, in aggregate, improve output. All of which analysts would know if the industry tried to hire analysts with operational experience!

robocat 9y ago

Hard to take article seriously with such a misleading comparison between graphs: productivity was shown on a log scale, and corporate profits on a linear scale...

segmondy 9y ago

Old news, 4/2017 "Labor is being paid first again" - citi http://www.salon.com/2017/04/28/labor-is-being-paid-first-again-american-airlines-investors-complain-after-company-gives-pilots-and-flight-attendants-raises/ http://www.salon.com/2017/04/28/labor-is-being-paid-first-ag...