Distrust of Big Business at All-Time High

The post recession world has, understandably, been a deeply cynical place, and a major indicator of this is the historically high level of distrust of corporations, if not the U.S. economy in general. As The Economist reported:

The share of Americans who hold “very” or “mostly” favourable opinions of corporations has fallen from 73% in 1999 to 40% today, according to the Pew Research Centre. Surveys by Gallup of views on big business show less extreme swings, but point in the same direction (see chart). Over 70% of America’s population believes that the economy is rigged in favour of vested interests.

Such growing hostility to business is in evidence across the rich world. Britain’s decision in June to leave the European Union was driven in part by popular discontent with big business, which had lobbied heavily to remain. Many continental Europeans are becoming ever more vocal in expressing their long-standing doubts about “Anglo-Saxon capitalism”.

This backlash against big business is already having an impact on policymakers. The antitrust division of America’s Department of Justice says that under President Obama it has won 39 victories in merger cases—deals blocked by courts or abandoned in the face of government opposition—compared with 16 under George W. Bush. Those victories included a string of blockbuster deals such as Comcast’s proposed bid for Time Warner Cable and Halliburton’s planned takeover of Baker Hughes. The European Union has launched a succession of tough measures against Silicon Valley’s tech giants, such as asking Apple to stump up billions of euros in allegedly underpaid taxes in Europe, and allowing European news publishers to charge international platforms such as Google that show snippets of their stories. Britain’s new prime minister, Theresa May, has said that she may cap CEO pay and put workers on boards. Governments worldwide have started co-operating to curb the use of tax havens.

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The Globalization of Plutocracy

According to a 2015 paper by American political scientist Larry Bartels of Vanderbilt University, the gap between the rich and poor — and the subsequent unresponsiveness of government to the needs of the majority — is not just a feature of United States, as a multitude of studies have revealed. The struggle between the haves and have nots seems inextricably tied to our species, varying only be degree.

For example, in almost every nation Bartels studied, the wealthy were generally and categorically opposed to social spending, even during bad economic times. Continue reading

Who, or What, is to Blame for Inequality?

Over at the Washington Post, columnist Matt O’Brian reveals how inequality has less to do with a small class of super wealthy elites, and more to do with the structure and culture of many big U.S. companies

The easiest way to think about this is to think about the different types of inequality. There isn’t just inequality between everyone, but also between everyone at a single company. Why does this matter? Well, if CEOs really are gobbling up a bigger and bigger slice of the profit pie, then inequality within society at large should have increased because inequality within companies increased. But that’s not what happened. The research team of Jae Song of the Social Security Administration, Fatih Guvenen of the University of Minnesota, and David Price and Nicholas Bloom of Stanford were able to look at what had previously between private earnings data for every company between 1978 and 2012—the best data we have so far—and found that the pay gap between executives and their own workers had barely changed during this time. What had changed, though, was the pay gap between every worker at the highest-paid firms and everyone else. In other words, inequality exploded because the top 1 percent of companies were making more and paying all their employees more. This was true across the country and across industries.

It is not entirely clear why this is the case, but one hypothesis is that technological innovation has made every industry “winner-take-all”, meaning it is easier than ever for the most ruthless and resourceful companies to dominate a particular market. This explains the rise of global behemoths like Google, Amazon, Apple, and Facebook, all of which lack any true competitors in their respective industries.  Continue reading

Universal Basic Income is About to Get Its Biggest Test Yet

After decades of discussion and support among academic circles, as well as a few small-scale but promising experiments, universal basic income is about to get its biggest and possibly most decisive try yet. Writing for Slate, the co-founders of one of the world’s leading nonprofit charities lay out their plan to give this innovative idea its due:

The organization that we founded, GiveDirectly, has decided to try to permanently end extreme poverty across dozens of villages and thousands of people in Kenya by guaranteeing them an ongoing income high enough to meet their basic needs—a universal basic income, or basic income guarantee. We’ve spent much of the last decade delivering cash transfers to the extremely poor through GiveDirectly, but have never structured the transfers exactly this way: universal, long-term, and sufficient to meet basic needs. And that’s the point—nobody has and we think now is the time to try.


We’re planning to provide at least 6,000 Kenyans with a basic income for 10 to 15 years. These recipients are some of the most vulnerable people in the world, living on the U.S. equivalent of less than a dollar. And we’re going to work with leading academic researchers, including Abhijit Banerjee of MIT, to rigorously test the impacts.

By “rigorous” we mean a few things. First, the test must be experimental, so that we generate unbiased and transparent estimates of impact. Second, the guarantee must be a long-term commitment. We already know quite a bit about the beneficial effects of giving people money for a few years; the key question is how the knowledge that your livelihood is secured for more than a decade affects your behavior now. Do you take more risk? Get more schooling? Look for a better job? Third, the guarantee needs to be universal within well-defined communities, since the goal is as much to understand social dynamics as individual behaviors. While various other basic income pilots have been conducted in the past, none so far have met all three of these criteria.

The group estimates that this evaluation will cost roughly $30 million, 90 percent of which will go directly to the poorest households, and the remainder to the staff, office, payment fees needed to deliver it. Because it is being tried in a developing country, the costs to make people’s needs will be lower, thereby making the project more affordable. It will also complement similar experiments being planned in FinlandCanada, and elsewhere.

And even though it will provide some well needed empirical evidence, on the largest scale thus attempted, the authors point out that there is plenty of data already available from prior attempts:

As it turns out, that assumption was wrong. Across many contexts and continents, experimental tests show that the poor don’t stop trying when they are given money, and they don’t get drunk. Instead, they make productive use of the funds, feeding their families, sending their children to school, and investing in businesses and their own futures. Even a short-term infusion of capital has been shown to significantly improve long-term living standards, improve psychological well-being, and even add one year of life.

On the other hand, well-intentioned social programs have often fallen short. A recent World Bank study concludes that “skills training and microfinance have shown little impact on poverty or stability, especially relative to program cost”. Moreover, this paternalistic approach is often for naught: Jesse Cunha, for example, finds no differences in health and nutritional outcomes between providing basic foods and providing an equally sized cash program. Most importantly, though, the poor prefer the freedom, dignity, and flexibility of cash transfers—more than 80 percent of the poor in a study in Bihar, India, were willing to sell their food vouchers for cash, many at a 25 to 75 percent discount.

Whatever the results might be, I am definitely looking forward to seeing what we can learn from this approach. Favored by economists and political scientists across the political spectrum, UBI promises a streamlined, transparent, and affordable way to alleviate poverty, stimulate economic activity, and adapt to a possible future of mass automation and scarce jobs. Or so we will see in due time, hopefully!

Why the World Must Tackle Inequality

In an opinion piece in the Boston Globe, former U.S. Secretary of State Madeleine K. Albright makes the case for why reducing global wealth inequality is one of the most crucial goals of the 21st century. Whatever you think about her record on the job, I think she makes a reasonable case.

First, reducing poverty and inequality is not only a moral imperative, it is also an economic necessity. I remember a time when some touted the benefits of “trickle-down” economics. Well, it turned out the trickle never reached the bottom. In fact, evidence shows that economies where only the rich do better witness more frequent slowdowns, while countries where the poor do better generally experience higher GDP growth. Income distribution matters for sustainable economic growth.

Second, smart policies focused on the poor and middle class can reduce inequality. We need not accept extreme poverty as inevitable. Improving educational quality, ensuring that the poor have the same legal protections as others, and increasing access to health care can all help promote an economic system that is equitable, efficient, and capable of sustained growth.

These elements are also consistent with the idea that strong economies do not come from the ripples created by the rich, nor from handouts provided by government; a healthy economy is like a house — it must be built from the ground up.

Indeed, what better way to ensure a strong, sustainable economy than to have the majority of the population employed in well paying and stable work, which in turn supports a market of consumers who can continue driving the demand for goods and services.

(Moreover, as even early 20th century entrepreneurs like Henry Ford understood, better pay meant lower turnover and less labor costs, something that should be obvious to anyone that ever takes a moment to see what an unmotivated and unhappy working environment looks like.)

Third, tackling income inequality and tackling gender inequality must go hand in hand. Although significant progress has been made in closing the gender gap over the last 20 years, a new report by the World Economic Forum suggests that the annual pay for women still only equals the amount men were earning 10 years ago. Moreover, the report suggests that if current trends continue, it will take another 118 years before the pay gap between men and women is closed. We simply must apply more urgency to this problem, which is why we should all support the ambitious target set by the U.N. to achieve gender parity by 2030 as part of the new sustainable development goals. The involvement of the U.N. is also a clear sign that the broader challenge of inequality needs both national and international attention.

Note that much of this global pay gap has to do with the sorts of work that are available — or I should say, made unavailable — to women around the world, as well as the lack of flexibility in requiring women to bring in more income to cash-strapped households while still expecting them to handle the bulk of child raising. Women need access to educational and employment opportunities that will offer more prosperity, and be allowed to more easily balance their familial obligations with their economic ones (giving fathers such flexibility would also help mitigate these issues).

A fourth principle is that while technology is a cause of rising inequality, it can also be a part of the solution. Consider that within a decade, more than two-thirds of people living across the Middle East and North Africa will have a smart mobile device with the computer power equivalent to what all of NASA had in 1969 when it put a man on the moon. These devices could open up unprecedented entrepreneurial and educational opportunities, including through virtual exchanges.

Granted, there will only be so many jobs remaining once technology has rendered most of them obsolete or less labor intensive. There will most likely need to be some sort of dramatic restructuring of the economy, up to and including some sort of guaranteed basic income for those unable to find any of the comparatively few jobs that remain. (Technology would certainly help to facilitate such a scheme.)

This leads to the next point: the consequences of globalization and technological innovation, for all their benefits, must be acknowledged and addressed.

Still, we must also recognize that the dislocations caused by globalization have contributed to the problem of inequality, and technology affords new avenues for the venting of this frustration. And while one cannot draw a direct link between poverty and terrorism, it is not hard to see how stark inequality breeds instability and the conditions where extremism takes root. So we must find an antidote to the feelings of selfishness and social helplessness that risk defining this era.

One important way leaders can help is by encouraging public service. That’s because service is transformative, making people more aware of needs around them. It bridges races and classes, diminishing differences in the pursuit of common goals. And it demonstrates that difficult national and international problems can be addressed and overcome by citizen action.

With infrastructure to maintain, a growing elderly population to care for, and other socially necessary projects, there is no shortage of valuable services to be done both at home and abroad. What is needed are more programs and companies, both public and private, that can train, mobilize, inspire, and support citizens in these ventures. As we reach the point in which constant growth is unattainable or even unnecessary, we must shift to an economic arrangement that focuses on the maintenance of civilization.

In recent years, the world has grown more and more aware of the fact that it cannot prosper if it is too sharply divided between rich and poor. We have learned that it is not enough to raise national income or increase national rates of economic growth, for even then, the majority of the population is often excluded. The key instead is to look for inclusive ways to promote growth so that even those who have very little will be able to climb the ladder of opportunity.

None of this will be easy, and the problem of inequality cannot be solved overnight. But it is important to try — not only because it is right, but because a more inclusive world will also be more peaceful than one where many people starve, while others buy diet books.

Never before has humanity had access to so much capital and technology — to the means of eliminating suffering on a mass scale — yet fallen well short of its potential. While poverty and deprivation has always been the condition for the vast majority of humans that ever lived, only over the last few decades have we developed the logistical capacity and resources to address these problems.

There is no reason why less than a hundred individuals should have more wealth than literally half the world, the vast majority of whom are mired in poverty. There is no reason why tens of millions of people who are working hard and meeting the market demand for laborers are nonetheless poor despite all that. It is harder and harder to justify these gaps and inequities, and at the very least, we need to start re-thinking the way we structure our economies and allocate our resources. Otherwise, the world is going to be harder and more miserable place for all its denizens.

What are your thoughts?

The System is Against Millennials

Millennials are endlessly criticized as lazy, self entitled, and narcissistic. But as Steven Rattner makes soberingly clear in a 2015 New York Times article, young Americans are among the most hapless generations in a century, due more to the economic system they have inherited than to flaws of character and work ethic.

Americans between 18 and 34 are earning less today (after adjustment for inflation) than the same age group did in the past. A typical millennial averaged earnings of $33,883 (in 2013 dollars) between 2009 and 2013. That was down 9.3 percent (after adjustment for inflation) in just a decade and is the lowest since 1980. Older Americans have fared considerably better; earnings of all full-time workers were roughly flat between 2000 and 2011.

Still more striking is that millennials have endured falling earnings even though they have attended college in record numbers.

I think the visual data speak louder than words:

Millennial Suffering IMillennial Suffering IIIMillennial Suffering IV

A major reason is the recession. Those who graduate in weaker economic times typically earn less than those who enter the work force during more robust periods. Starting behind often means never catching up.

Millennials who didn’t attend college have found their wages particularly squeezed, perhaps because of the decline of middle-skilled jobs in sectors like manufacturing, a clear consequence of globalization.

The wealth of millennials has been hit even harder than their incomes. Their median net worth was just $10,400 as of 2013, down 43 percent from the $18,200 that Gen Xers had in 1995 when they were under 35. With incomes squeezed, millennials are not only not saving much; they are dipping into whatever savings they do have.

That’s worrisome when combined with weak incomes and low net worths. Millennials also participate less frequently in 401(k) plans and, scarred by the recession, invest less and keep more than half their money in cash — not a great long-term strategy.

Another huge drag on the finances of younger Americans is the mountain of student debt that has been piled up in recent years. Members of this year’s graduating class left their campuses owing an average of $35,051, about twice the levels borne by their counterparts two decades earlier (after adjusting for inflation).

Indeed, as a college education becomes increasingly necessary to acquire a relatively better job, average tuition has risen by an incredible 234 percent since 1993, compared to an overall inflation rate of 63 percent. With all that debt and little income to show for it, it is no surprise that car and home ownership — once considered the staples of the middle class — are subsequently down as well.

While part of this trend can be attributed to changing tastes — for all the talk of their wanton materialism, young people today seem indifferent to acquiring luxuries — one has to wonder if such wariness of big purchases has been shaped by necessity. More to the point: young people are also holding off on marrying and having children, which are also expensive endeavors.

Most of these problems could be resolved by simply increasing the earning power of young people (and for that matter, most Americans). But that would require either government mandate, the initiative and goodwill of employers, or labor action on the part of workers. I wonder which, if any, will come first? All I know is that something will have to give, as tens of millions of young people around the world face an uncertain, unnerving, and unsustainable future.

Lessons From Ikea on the Merits of Better Pay

While many American employers regard higher wages as anathema to business success, Ikea, the world’s largest furniture retailer, is thriving in the U.S. in large part because of its generous compensation. As HuffPo reported:

Under the system that the ready-to-assemble furniture maker first established in January [2015], the starting wage for any given store in the U.S. reflects the cost of living in that particular area as determined by the MIT Living Wage Calculator, which takes into account the local cost of rent, food, transportation and the like. After the second round of raises, which is slated for this coming January, all of the company’s U.S. stores will be paying at least $10 per hour, and the average minimum wage across all locations will be $11.87 — a 10.3 percent increase over the previous year, according to the company.

Rob Olson, chief financial officer for Ikea U.S., told The Huffington Post that the company is already reaping dividends from its decision to hike the wage floor and to factor in the local cost of living in doing so.

“We’re very pleased so far,” Olson said.

So what types of benefits has Ikea seen?

For one, less turnover. Although it’s only been six months since the raises went into effect, Olson said Ikea is on pace to reduce turnover by 5 percent or better this fiscal year. Holding onto employees longer means the company is spending less on recruiting and training new replacements.

Ikea is also attracting more qualified job seekers to work at its stores, according to Olson. Pay for retail sales workers in the U.S. is generally very low, with an average industry wage of just $12.38 per hour, according to the Bureau of Labor Statistics. But Ikea’s average store wage is heading north of $15. After its living wage announcement [in 2014], the company opened two new locations — one in Merriam, Kansas, and another in Miami — and the higher wages (and attendant publicity) likely helped the company lure more candidates.

“At both of those stores, the applicant pool was fantastic,” Olson said.

The Swedish multinational is seeing the same benefits that just about every company that pays its workers well enjoys: lower turnover (and thus savings from training and recruitment); higher morale and productivity; and the attraction and retainment of talented, quality employees. It should be intuitive that when people are given a stake in a company — through better wages, benefits, and overall treatment — they will feel invested enough to stick around and work hard, thus giving back to their employers. That has always been the logic behind paying executives and higher managers so well, so why shouldn’t it apply to everyone else?

While I am not keen on giving the government too much power, I am not so sure companies are any more rational or knowledgeable about the matter either. Ikea is hardly the first anecdote proving that paying and treating workers better generally results in higher productivity and thus better long-term performance. Indeed, that makes intuitive sense, whatever the empirical evidence, and it is precisely this logic that companies use to justify the high payouts to executives (though rarely to average workers who contributed to said profits as well).

And yet so many companies — the majority in fact — continue to sit on their high profits, or allocate the lion’s share to the top of their corporate structure, all the while bemoaning the high costs of turnover, low productivity, etc. Mere ignorance, short-term thinking, and pressure from greedy shareholders interested only in immediate (and ever-higher and unsustainable) dividends are among the reasons for this problem (to say nothing of a culture that values profits and ruthless commerce at all costs). Being a business does not entail knowing, let alone caring about, the psychological and economical factors involved in corporate policy.

Personally, I am of the view that if the only way you can run your business is to knowingly beggar your employees — for example, paying far less than what can reasonably sustain basic necessities like shelter and healthcare — despite being able to well afford better pay by simply allocating a little less to yourself and your shareholders, then you do not deserve to run a business. I know that is an idealistic and moralizing approach, but why shouldn’t it be, given how integral business policies are (in the aggregate) to societal well-being. If we do not want government calling the shots, than it is contingent on all citizens — especially with the most power and resources — to do what they can to behave ethically and socially responsibly (indeed, this is what libertarians and many conservatives argue: that it is on the private sector, not the public sector, to create a more just and prosperous society).

My short answer: leave it to workers themselves, via unions, co-ops, or other empowering structures, to contribute to the decision-making process of corporate policy. It is hardly a perfect system — what institution is? — but it seems to be the best and most practical alternative to hierarchical and often out-of-touch corporate models, as well as government fiat (which of course is typically no less hierarchical and aloof). Otherwise, we would have to hope that low-wage employers come around to Ikea’s position, especially as it is as much in their interests as those of their workers.
What are your thoughts?

The Panama Papers and the Crisis of Capitalism

The Panama Papers are a collection of 11.5 million leaked legal documents spanning over four decades — amounting to an incredible 2.6 terabytes of  data — that contain details on on over 214,000 offshore companies and their shareholders and directors — who include the leaders of five countries — Argentina, Iceland, Saudi Arabia, Ukraine and the United Arab Emirates — and the officials (or their relatives and confidants) of more than 40 other countries, including Brazil, China, France, India, Mexico, Russia, and the U.K.  Continue reading

Even Hardworking, Well Educated Poor Kids Rarely Climb Out of Poverty

Despite its reputation for offering unmatched upward mobility and opportunity, the United States is still a difficult place for people on the lowest rungs of society to climb to prosperity. So concludes some recent research reported in the Washington Post that found even the most resolute and intelligent among the poor have a difficult time getting ahead.

[In] large part, inequality starts in the crib. Rich parents can afford to spend more time and money on their kids, and that gap has only grown the past few decades. Indeed, economists Greg Duncan and Richard Murnane calculate that, between 1972 and 2006, high-income parents increased their spending on “enrichment activities” for their children by 151 percent in inflation-adjusted terms, compared to 57 percent for low-income parents.

But, of course, it’s not just a matter of dollars and cents. It’s also a matter of letters and words. Affluent parents talk to their kids three more hours a weekon average than poor parents, which is critical during a child’s formative early years. That’s why, as Stanford professor Sean Reardon explains, “rich students are increasingly entering kindergarten much better prepared to succeed in school than middle-class students,” and they’re staying that way.

Poverty makes it difficult for parents to spend quality time with children, let alone afford the various extracurricular activities that enhance a child’s aptitude for learning and good behavior earlier on. Even middle class families find it increasingly hard to raise a child optimally, especially as most households require at least two incomes to stay afloat, and ever longer workings hours. Continue reading

Stashing Wealth Overseas Starves Local Government

Around 8 percent of the world’s total financial wealth resides in tax havens — countries or territories where taxes are very low or even nonexistent, and where rules and regulations are lax, opaque, or preferential towards the wealthy. These places are usually small, affluent, and low-key on the international scene, such as the Cayman Islands, British Virgin Islands, Isle of Man, Jersey, and San Marino (not exactly household names, although the first two have by now become synonymous with wealth).

American citizens are among the biggest customers for tax havens, which is not surprising given that the U.S. economy is the largest in the world by a significant margin, with the biggest financial sector and greatest number of billionaires and millionaires (e.g., the sorts of folks who are most eager to stash their wealth out of reach from tax authorities).

According to research by economist Gabriel Zucman of the University of California, Berkeley, the richest Americans now have at least $1.2 trillion based in offshore accounts, with the volume of overseas wealth quadrupling over the last thirty years. Needless to say, most of the income generated by this wealth goes untaxed. Continue reading