In my post about a CNN video about the rise of socialism among the youth, Mr. Divemedic left a comment that I have been ruminating on for a day.

Case in point: Several decades ago, I worked the overnight shift for the Walt Disney company, back when Michael Eisner was the CEO. We had a meeting with a company executive one night and we were told that Disney’s goal was to have no permanent, full time employees within ten years. They wanted to replace all of their full time employees with contracted employees through subcontractors. They said that health care costs for employees was costing the company $90 million a year.

One of my coworkers then pointed out a news article where the CEO (Eisner) had received $270 million in pay, company stock, and other benefits the previous year. He then asked if they could pay the CEO only $180 million and let all of the other employees keep their jobs. The meeting was abruptly ended at that point.

In economics, there is something called externalities.

According to Investopedia:

An externality is an economic term referring to a cost or benefit incurred or received by a third party. However, the third party has no control over the creation of that cost or benefit.

So let us say that Eisner got what he wanted and Disney was able to fire all but a few managers and replace all workers with part-time sub-contractors and gig workers.

Disney is vital to the economy of central Florida in the Orlando and Kissimmee region.

So what happens then?

There are over 77,000 full-time Disney employees in Florida.

Disney employees lose the bulk of their salaries.  Others get fired completely.  They all lose their health care.

Some would go underwater on their mortgages.  Others will move out leaving vacancies.  New people would be less likely to relocate to the region for gig work.  This would harm the housing marking in central Florida.

Out of work employees would go on unemployment.  Some would go on welfare and Medicaid.  Others would go without healthcare and end up being uninsured at the ER, which is reimbursed through tax dollars.

The deprecation of the housing market would reduce property tax revenue in the region, leaving local budget shortfalls.

Tourists spend money but they don’t buy homes.

Disney would save $90 Million on healthcare costs.  Millions more on salary.

Eisner (or the current CEO) would pocket hundreds of millions in bonus money from the “cost savings.”

But where did those cost savings come from?  By dumping those costs onto the American and Florida taxpayer that has to foot the bill for out of work employees, the loss of healthcare, and hit to the local housing market.

Disney would have profited by making employee costs a negative externality.

This is reprehensible.

If Disney dumped a bunch of old rides and rotting food into Lake Okeechobee and polluted the water, rather than pay for proper waste disposal, people would rightly be angry about that sort of negative externality.

However, dumping workers onto unemployment, welfare, and Medicare instead of making payroll somehow gets a pass.

It should not.

If you are a conservative that is worried about entitlement spending, letting companies cost cut for profit by dumping people onto entitlements should enrage you.

It’s not socialism to say “the CEO can’t bonus himself with layoffs” when the taxpayer picks up the tab for those layoffs.

 

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By J. Kb

5 thoughts on “CEO bonuses and externalities”
  1. Disney makes basically all its money from government monopolies (intellectual property). Indeed, they have consistently lobbied for, and won, expansions of those monopolies they use. Negative externalities are part of all they do.

  2. Years ago, a company i worked for tried to do that “outsourcing” bullshit. Basically they would fire everyone in the particular dept. I was in at the time and then rehire those they deemed qualified (never told us what qualifications, which made things even more suspicious) as contractors for a year, and every year the contract had to be negotiated.
    Things went downhill quickly, morale and productivity hit the ground like a wet bag full of fresh turds, and people started leaving on the spot without passing any of their knowledge.

    I personally think that it was the idea of a small group of greedy CEO dbags, trying to get uber inflate their yearly bonuses.

    Anywho, that *genius* idea assploded rather spectacularly in their faces, cost them their jobs and their stupid bonuses. Biggly. 😀

    Karma is a mean mistress. They found out the hard way when she shoved a rusty 4″ pipe up their behinds. LOL!

  3. This is what happens when you have laws that “perversify incentives”. “Oh, there are laws that allow us to dump all these costs onto the government? Sure thing!” and really, why shouldn’t they? If someone else is willing to bear that cost there is no reason for you to do so.

    Now I agree it is a shit thing to do, but the fix is not to try and outlaw shitty behavior. The thing to do is to disincentivize that shitty behavior in the first place.

    Just off the top of my head, maybe companies should pay a portion of their gross income for every “contract worker” they have who is also taking advantage of a social safety net. This would be part of a rewrite for labor taxes, aimed at incentivizing work with full benefits. If you are a small business with little income this will not be a lot to you, maybe a few tens to hundreds of dollars per worker per year, but it could be more than hiring several full time employees for a huge business that really should not be functioning like that in the first place.

    Or, you know, reform the social safety nets that allow this kind of behavior in the first place.

    There are lots of ways to disincentivize this kind of behavior without increasing the power of a central government.

    1. A lot of this is the result of government regs that were supposed to fix other problems.
      Thus, one can come to the conclusion that any regs meant to fix this will lead to other problems and other perverse incentives.
      A better fix may be to remove government aid & bailouts for “too big to fail” companies. Kind of like one fix for dangerous sections of road is raising the speed limit.

  4. This is particularly interesting when you stack it next to California’s ‘genius’ law, AB5…

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