We need quality policymakers - and meanwhile we all may try contributing some ideas

An Italian case

On last Friday evening FIAT employees in Turin approved by a tiny majority the CEO proposal to invest 1 billion Euro in the Mirafiori factory, in change of an increase in productivity.

The CEO claim, shortly before vote, that would his proposal have not been approved by at least the 51% of employees he would have moved production to another country. This statement has been read as a blackmail, and many of the worker who voted in favor of the CEO proposal admitted they did grudgingly, to save their work.

It is worth mentioning that “improving productivity”, in the CEO’s project, actually means an increase of work days (6 per week instead of current 5), no limit in extra hours, and a reduction of work pauses to a total of 10 minutes per day (that is, if you have to go the toilet, then you have to be very quick). In short, a huge reduction of rights formerly enforced by national contracts. Of course workers will be paid more in change of their effort.

No surprise, since yesterday early morning all Italy is commenting and interpreting the meanings of this new fact. Mirafiori factory is, in Italy, a symbol. FIAT is one of the largest manufacturers still resisting post-industrialization, after almost all big steel and tyre plants have closed. And people is very worried of what might happen, would this last bastion vanish.

Besides its emotional meanings, that of FIAT is a very complex problem, one in which you feel any part involved is right in their argumenting.

Mr. Marchionne, the CEO of FIAT, is perfectly right when he says automotive industry is now global, and the restrictive rules present in Italy and other countries make the game unleveled.

The workers who voted “no” to the agreement are also perfectly right, when they observe their dignity has receded to the level it had at end of nineteenth century, when Italy made timidly her entry into “industrial revolution”.

Overall, the only Italian institution maintaining a glacial calm in this critical event is our Government. They seem more interested in publicly expressing their high esteem and trust to mr.Berlusconi, who is under the n-th charge consequent to his questionable lifestyle - this time is an affair of graft and use of under age prostitution.

My big, very big question is, however, another. Why are we at this point? What will it happen next? As anyone in Italy I feel, let’s say, a bit nervous.

First, the hard facts. The 2008 financial and economical crisis has stroke hard, and still is despite the daily reassurance of our Government. Automotive industry has hugely contracted worldwide, with sales reductions in the order of two-figures percentage. But FIAT performance has suffered much more than its competitors: contraction amounted, it is said, to more than 30%!

While competitors inundate television advertisement time with spots claiming the incredible capabilities and almost-zero emission of many new models, FIAT is still publicizing minor restyling of cars conceived in the beginning of new century (themselves more or less overt evolutionary improvement on models dating to the Nineties). Obviously FIAT investment in the last years has not been comparable to the competitors’.

This may not be a specific fault of mr. Marchionne: when he began the FIAT CEO he inherited a dramatic situation, of a company once florid and then hugely indebted, with no industrial plan and, more important, no clear vision for the future. His merit has undoubtedly been to lift FIAT from the dust, and allow it to survive some years more.

Has this effort been worth? We’ll see. Signs are all but good, however: oil reservoirs are emptying and it will not be a long time that the little remaining will be routed from transportation to quality chemical manufacturing like plastic production. The destiny of conventional cars is already signed, and the most conservative-minded manufacturers, FIAT included, already condemned.

In the remaining would-be ten years of conventional, internal combustion cars operated with oil derivates, competition will be dramatically skewed by contracting sales, vanishing margins and increasing quality standards. What we see today is not incidental, is just the beginning of a medium-time trend at and of which a whole market will be extinct. (Extinction is a normal process, even to the powerful: think Dinosaurs…)

Who will survive? The most innovative, able to shift from oil economy to something different.

But here is a big point: to be “innovative”, today, demands huge timely investments, which in turn demands clear crisp vision. And these huge investment often result in apparently minor improvements - the classical rat generated by a mountain: doing and defending them on the next day director board meeting requires a lot of integrity and willfulness, both in the proponents and the other directors. In short: courage. A lot of courage, in companies which are more and more often conduced under the aegis-idea of value to the shareholders.

The apparent reduction of improvement size in front of investment is common in mature market, and when I tried to understand its cause an image turned out to be quite easy to grasp: think to world records in sports where human physiology has already been pushed to the limit, like run on 100m, or figure skating. Immediately after these sports have been codified and records began to be recorded systematically, their survival time counted in days. Improvements were in fact very easy. But as time passed and results accumulated, world record survival time increased a lot, and to date it happens really seldom some is improved.

Innovation follows a similar path. As knowledge accumulates, as cooperation ways and connections are discovered and exploited, fewer and fewer uncharted possibilities remain. Unless, of course, some event so dramatic to shake an entire knowledge to the grounds. Something rare, but not impossible (and vanishing oil reservoirs will help a lot).

False premises, true consequences

What I find most appalling in the FIAT crisis is, all the medicine seems routed into one direction while many other are left to gangrene. The overall attitude resembles me that of a high risk taking gambler, who bets all the stake hoping in a lucky outcome, more than of someone carefully and quietly analyzing all the whats and whys.

In automotive industry it is well known that labor cost contributes the total a 7%. You may double, triplicate, multiply by ten worker’s productivity, but the result you will obtain will remain negligible. Zero multiplied by any positive number remains zero, whatever you do or claim or hope.

That it is a truth looks to me evident from another impressive figure. Although so important in the Italian imaginary, the Mirafiori FIAT factory in Turin employs just a bit more than 5000 people. This is a very tiny fraction of Italian workforce.

In fact, automotive production plants are heavily automated. The most “advanced” manufacturers have pushed automation more than others, so that workforce had actually shrinked at assembly line level.

The Italian insistence on the problem workers are beginning to face hides an important aspect: although socially dramatic, the improvement made possible by the new FIAT agreement is marginal from a technical standpoint. Why, then, is it so practiced?

Another point, not necessarily independent from the latter, is the huge wage difference in FIAT and similar companies between the CEO on a side, and workers on the other. In FIAT, the salary of mr. Marchionne is more than one thousand (yes, no kidding: more than 1000 times) than a line worker’s. These “line workers” are in the most part not unqualified laborers as in the first half of past century, and often own a low-level or full engineering degree.

This disparity is immoral, sure. But also an indicator that something is going wrong, beyond any human ability to fix.

It indicates that all responsibility, all merit and demerit of the FIAT enterprise is in the hands of a single man. This man is demanded to take decisions 1000 times more intelligent than the engineers working in his plants: something not even Superman would be able doing.

Any modern enterprise produces wealth (with great fatigue) thanks to teamwork. It does so, simply because the scale of problems to be solved on the fly is so large that no single human mind may even contain, whatever the intelligence quotient or skill level.

When things are manifestly so, representing corporate reality as basically a single person endeavor is just building intentionally a fiction. To the benefit, I imagine, of the shareholders in whose names the company pretends to be conduced.

And when millions boobies (and a few hedge funds with rapacious hands and well trained lawyers) see a person singled out by his or her unusually high wage, that person is not just a manager: is the designated scapegoat would things turn wrong.

At best, in case of bankrupt his sacrifice will deflect justice arrows from its likely targets in banks and major investors. If this happens, he will be abandoned immediately by the board, and all his decisions thrown away.

Besides this, I gut-feel a strong suspect of companies whose CEO is paid more than, say, 20 times the average worker’s. They seem to me largely fictive (an extremely high risk fiction) - and I would be very careful investing in them.

In the specific case of FIAT, my suspect is reinforced by the vivid impression that crisis handling is made in an incredibly single-minded way: a sign that all major decisions are really being taken by a single, isolated mind backed by no support and doomed to failure.

Would I be in the Italian Government, I would immediately call attention of FIAT management on this, and start as soon as possible a close monitoring on company governance.

Is really “solidarity” a word of the past?

Since somewhat before the advent of mr. Berlusconi in 1998, Italy has faced a massive propaganda trying to convince people that free competition would have massively improved everyone life and wealth.

Competition demands efficiency, they said.

The tenets were the usual Reagan and post-Reagan neo-conservative slogans: tax reduction, a shrinking of the public, less regulations. All these ideas were grounded on a controversial economic theory, presented to laypeople as “the Laffer curve”.

This theory says that if tax are reduced only slightly then overall efficiency of the system reduces. But as tax reduction gets higher and higher, it finally reaches a point after which efficiency returns to grow. If the process is continued to the extreme, efficiency is maximum, but social cost is then zero.

Attractive, isn’t it?

Later on, it was proved that the simple smooth curve which described Laffer argument was incorrect. The phenomena behind are suspected to be chaotic, and fundamentally incontrollable; cutting taxes may reduce efficiency to zero (as punctually happened).

And, most important, people realized the hard way that paying taxes is a maybe a “social cost” (beared by individuals), but negligible in front of the dramatic consequences of not paying them.

The neo-con wave arrived in Italy as usual much later than in the U.S., and found many advocates just when Laffer curve was being dismissed. I’m not skilled enough to understand why Italians were so positively impressed by that theory, but sure it seemed to back up with data the tendency to selfish individualism already important here.

Then it rooted (and rotten, for sure).

When prof. Prodi’s “Ulivo” won elections the last time against the “Partito della Libertà” by mr. Berlusconi, both coalitions presented programs modeled after variants of the neo-conservative ideas.

“Liberism”, in Italy, began to be identified with “the right of doing peer-to-peer competition on low-standard products against emerging countries”, China first. Neglecting a tiny detail: while we were trying to reduce our standards and labor costs, China was conducing the largest research and development campaign in the whole World. We reduced costs, not having with the Euro the possibility of damping by devaluing Italian Lira. The Chinese, meanwhile, improved quality.

Final result: game lost by Italy, even before we began it (and with China not even realizing we were trying to beat her).

With a caveat: it was not a game. This trick, of hoping things may go well in lack of any sacrifice, thanks to a mixture of luck, shrewdness and unscrupulousness, simply did not work. And the defaults began, long before 2008.

Cirio, a large company involved in food processing, was the first.

Then, Parmalat.

Then more recently, the Alitalia affaire and the clumsy attempt of “saving it” by the government.

FIAT, in that phase, was “just one of the many”, with a general decay of productive and innovation capacity from which it was not possible to fully move away even today.

It is more than obvious, now, that individualism coupled with incompetence are a sure receipt for failure.

While individualism was rampantly presented as a virtue, solidarity was dismissed as ineffective old ladies stuff.

The disarticulated families common in other countries were praised as the next evolutionary step of italians. My impression was, on that time, the reason politicians tried so hard to disgregate the traditionally coese Italian families was to make easier to some privates to get their incomes, houses and terrains in order to move somewhat, for a short time, and with purely predatory means, a stagnant economy.

Fortunately for all, government included, the attempt failed. That was fine, because the Italian families are still the substitute of a modern welfare - something the government claims to not afford.

Here we come to an apparent paradox, maybe typical of Italy. According to the neo-con agenda, the Italian State retreated. But things appeared to go on the same way, independently, with no revolution or other dramatic events.

The main reason was, in my view, that families and nonprofit organizations took the part, silently, of large slices of the functions of the State. Often with better results. Solidarity, from the grassroots.

This has not been costless, of course: families especially have provided means to sustain the life of young people who, in recent times, is not any longer able to find medium-term occupation and suffers a drastic reduction of wage compared to the two preceding generations. Debt has increased and overall families are poorer.

Quite obviously this situation can not endure forever. Sooner or later most families will be on average too poor to act as a replacement for a missing welfare. The situation will then become really explosive.

Meantime, however, we see one thing: solidarity works.

One of the most cherished tenets of neocon advocates in Italy, that caring people on the small scale is worthless, is proving false.

Politicians should consider this, and support this tendency as much as possible, as an antidote to the overall decline.

(An old wisdom says people seldom change their mind after 40 years age. This applies to nearly the 100% of our politicians. Since it is their old-fashioned mind which caused almost all the problems we are in, it is likely that to enter a new way the best way would be to remove the old people, and renew politics drastically.)

We want quality policymakers

The biggest problem with Italian policymakers is, they are on average low quality people.

This is not their specific fault, of course, nor is the problem universal: there are many top-notch technicians at the level of Amato, Prodi, or Letta just to mention a few. But overall the problem is strikingly evident.

What is a low-quality policymaker? A univoque answer may not make sense, but we may use some anecdotes worth mentioning.

Few years ago, the “derivative scandal” exploded. Many municipalities, including large towns, subscribed with banks various futures promising short term cash in change of an interest rate close to usury.

Banks executives pushed aggressively these high risk derivatives, well knowing municipalities in that period were almost universally short of cash as central funding decreased.

Now the point with derivatives is, what is their price, exactly? You know how much cash money you get on the fly, but the actual interest rate you will pay is linked to future events which are objectively difficult to predict.

In fact, pricing derivatives is a difficult mathematical problem, involving the solution of Ito type stochastic differential equations.

To realize this is difficult and risky, a politician should know that stochastic differential equations exist, and that they have to do with the problem. Not being aware of this connection means not having an idea what the problem is and, then, choosing the most appropriate collaborators.

Of the many municipalities involved in the derivative affaire, only Turin and few others reacted in a competent way. In Turin a commission was appointed to price the derivatives, and the results have been used to obtain sensible contract conditions.

But the majority of municipalities felt prey of banks. Because of technical incompetence of public administrator.

The complexity of our interconnected and globalized societies demand from politicians awareness of technical subtleties, and ability to delegate and follow up. That is, a humble attitude.

I see this is far different from the inflated ego botchers which parties structures is more able to select: maybe warriors able to “fight” an electoral campaign, but not real policymakers.

How to get rid of this all? Because this, after all, is the problem.

Guess a violent revolution would miss the point. Most revolutions allow insignificant violent guys to emerge as “leaders”, and inevitably reinforce the myth of the invincible warrior, which is precisely behind most troubles we are now facing.

If FIAT is quickly approaching its bankrupt day, if Italy is declining, if the overall climate is dreary and cheerless in this wonderful country, it is precisely because the current social order has abolished peaceful teamwork and willful collaboration, replacing it with more or less competent single men (not casually: men - women are completely excluded from the process in Italy) left free to commit institutional suicides without any support.

Maybe, there is a remedy. Given that Italian politicians are so fond of quarreling in front of some television camera, we the civil society may give them rational arguments for which to exhibit their show.

We, the people in Italy of good will, may conceive and write the next laws.

We may - and no force would be able to stop us - dismiss the Unique Men and replace their random decisions by informed collaboration of technically excellent people.

We may, in short, elaborate our politicians next “decisions”.

For their, and ours, well.

Excuse me for this horrible tangle ball of ideas! And, thanks for patience.

Love

Mauri