Monday, August 23, 2010

The Ratchet Effect: Fiefdom Bloat and Resistance to Declining Incomes

The Ratchet Effect can be found in economies, societies and households facing declines in income and results (diminishing returns).

The Ratchet Effect is one key reason why meaningful reform of the status quo is impossible. In flush times, budgets expand as easily as waistlines, ratcheting up to consume ever-higher revenues. But once revenues start declining, the administrative/consumerist status quo is fiercely resistant to any reduction.

Like a body which has grown fat from excessive consumption, the status quo will resist any reduction in staffing or spending, sacrificing muscle to keep its layers of fat untouched.

Correspondent Kevin K. submitted this example of the ratchet Effect in higher education:Top ranks swelled at University of California at Davis:

UC Davis' administration fattened up in a way few other campuses nationwide could match from 1993 to 2007, with the third-highest increase in ratio of administrators to students among 198 universities.

UCD went from 3.2 full-time administrators per 100 students to 13.5. That 321.9 percent increase also was the highest in the 10-campus University of California system.

The figures are included in Administrative Bloat at American Universities: The Real Reason for High Costs in Higher Education.

Here is a telling tidbit from that report:

Arizona State University, for example, increased the number of administrators per 100 students by 94 percent during this period while actually reducing the number of employees engaged in instruction, research and service by 2 percent. Nearly half of all full-time employees at Arizona State University are administrators.

These same "ratcheting" trends are present in my alma mater, the University of Hawaii: administrative staff has continued expanding even as teaching positions have been slashed year after year: the "fat" defends itself with political victories in what I callinternecine war between protected fiefdoms in Survival+, cutting the muscle of the university (the teaching staff) to do so.

Meanwhile, as the maintenance department's budget has bloated up, the campus is slowly falling apart; the cause, we are told, is lack of funding, yet salaries, pensions and benefits have been rising for years. Could incompetence, inefficiency and plain old laziness have anything to do with the abysmal maintenance? That question is quickly snuffed out before it can ever be answered.

Security staffing has also risen, even as "crime" remains muted on campus and the security staff does little beyond writing parking tickets.

Even as the state's premier campus falls into disrepair, the system's top administration is doggedly constructing a massive new and totally unnecessary campus less than 40 miles from its main campus in Manoa, a political move to reward the powerful construction unions and justify its own rising headcount.

Salaries of top administrators have skyrocketed, supposedly to "match comparable private-sector salaries." Uh, right; how many private-sector assistant vice-presidents do you know who make $150K a year plus massive bennies? How many qualified candidates who would gladly take the job for $100K are among the nation's 8.5 million unemployed/10 million under-employed?

We all know how this works in an organization: when revenues are rising, everybody suddenly needs an assistant. In no time at all, meetings are being called to discuss the strategic planning process for calling meetings, and pretty soon there are more admirals and generals than during World War II when the Armed Forces were 10 times current force levels.

Mission creep sets in, and suddenly the corporation "should" be in everybody else's business, and it starts buying enterprises which add no value or enters markets it knows nothing about. The military soon needs to fight 2.5 wars globally, because you never know when the Bad Guys might decide to coordinate their attacks on us, and the National Security State realizes it botched its inter-agency coordination, so it contracts out huge new fiefdoms to enhance the coordination which it didn't have with fewer agencies and contractors....

It's called diminishing marginal returns. Throwing ever-larger sums of money at the (self-created) "problem" produces ever-less meaningful output.

On the household level, people accustomed to a certain level of consumption and "lifestyle" are pulling money out of their 401Ks to fill the gap between their income and expenses. Stories like this pop up with sobering regularity: Fidelity sees record number raid their 401(k)s.

What's also eye-opening is that 45 percent of participants who took a hardship withdrawal a year ago took another one this year.

A key concern is that these withdrawals are just that, they are not loans. As a result there can be a significant impact on someone's overall retirement savings. If the worker is younger than 59½, they'll pay a 10 percent penalty for early withdrawal in addition to taxes.

The good news in the report was that the average 401(k) account balance as of the end of the second quarter was $61,800; up 15 percent from the same time last year, but down from the end of the first quarter of 2010.

$62,000 isn't exactly a King's ransom in today's economy, but it sure is worth resisting the urge to withdraw it all to pay for things which are no longer affordable out of income.

Yes, some families are withdrawing 401K funds to pay for emergency medical care, and that is a tragic necessity. But is paying for education really a hardship? If the family can't afford $30,000 a year for college, then perhaps Junior should live at home and attend the state school or even community college.

The key data point here is that people are returning to the 401K well year after year. That suggests the possibility that the gap between income and expense is regarded as a hardship or crisis that won't go away until income rises to meet expenses, rather than the more painful solution of slashing expenses to meet income.

Anecdotally, I am hearing stories of husbands broaching a serious downsizing in housing and expenses, and being told "no way" by their spouses.

So the household's "muscle"--its capital, cash and retirement nesteggs--are all sacrificed to keep the "fat" of a bloated mortgage and consumer lifestyle intact.

Add The Ratchet Effect as another reason Why Nothing Changes and why reforming the status quo is effectively impossible. When the ability to tap cash or borrow runs out, then resistance to reduced expenses caves in all at once as the organization, state or household's basic insolvency can no longer be denied.

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