Author: George Papaioannou

An often-heard narrative about the American system is that though no one is guaranteed success in life, everybody is offered an equal opportunity to succeed.  Nothing can better prepare a person to fight for success in life than a good education.   Education is perhaps the greatest social equalizer.  Quite early in its history, the US recognized the value of education for the democratic and economic health of the nation.  By 1870 all states had free elementary schools.  However, even after ignoring the recent bribe scandal regarding college admissions, opportunities in education are increasingly tied to the income bracket of the students’ families.

As a result, educational opportunities are uneven and this shows in the social mobility of Americans.  For example, the likelihood that children will grow to move to a higher income class (intergenerational mobility) has declined in the US and is below that of other industrialized countries.  College education is what primarily makes upward mobility possible.  International data show that across countries lower intergenerational earnings mobility correlates with higher income inequality.   Given the high cost of college education, it is not a surprise, therefore, to see that the US, which is very high in income inequality, is also very low in intergenerational mobility relative to other industrialized democracies.

At the same time, access to a good education is far from open to all.  In 1985, 54% of the students admitted to 250 selective colleges came from the bottom 3 quartiles of income distribution; but in 2010, only 33% belonged to these income brackets.  In 2017, 38 elite colleges had more students from the top 1% of earners than the bottom 60%!  Tuition and fees in top colleges tripled relative to the national median salary between 1963 and 2013.  (The Atlantic, June 2018).  The average annual cost of tuition, room and board of all public universities was $19,189 in the 2015-16 academic year, hardly what a typical family would consider affordable.  Averages mask, though, individual university costs. In quite a few top national public universities tuition alone approaches or exceeds $20,000 a year.  The main reason is declining state support for higher education.

To make matters worse, state support most often ignores non-tuition costs for books, room and board, and thus fails to help poor students who cannot afford these costs.  As a result, benefits designed to help the needy end up helping disproportionately more those who can afford to pay (NYT, “When ‘Free’ College Isn’t Free” 3/19/2019).  And, of course, earning a higher education degree often comes with the life-long burden of student loans whose national aggregate has topped $1.5 trillion, spread across 45 million Americans.

The need to hold part-time jobs while studying is another source of unequal opportunities to quality education.  When I was still teaching, one of the most frequent excuses students gave for incomplete homework and assignments was their work schedule.  Inability to dedicate adequate time to studying due to work is also one of the reasons students drop out of college.

Affordability is intrinsically related to meritocracy.  The affordability-related question is: Can every student who wishes and qualifies for college education have one?   The meritocracy-related question is:  Does likelihood of admission correlate with candidate qualifications?  The above data suggest that because of low affordability, not all those who wish and can receive a college education.  And not all those who enter prestigious colleges deserve this over other better academically but worse-off financially candidates.  As Ross Douthat (NYT, 3/17/2019) writes, the interest of elites for intergenerational continuity coupled with the need of private universities for loyal alumni and streams of donations has led to the present uncomfortable balance of opportunities and meritocracy.   Private and top national universities engage in legacy and donations-based admissions to secure the resources that enable them to extend scholarships to needy students.  Thus, we simply recognize that we are willing to sacrifice meritocracy for wider societal goals.  Besides, there is another reason why universities, especially those that attract elites, should also enroll less advantaged students.  Without the latter group, elite colleges and universities would not offer their more privileged students a full social awareness of the other side of the tracks.  The problem remains though, how colleges that are much less populated by elite student groups would provide social awareness to their underprivileged students about the life and attitudes of the elites.

This being the state of higher education in the US, what should we do?  Making public college education free is one of the proposed solutions on the Democratic Party side.  But we need to consider some side effects.  First, a free good invites too much demand even by those that assign it very low value.  Thus, we might have too many students pursuing college education even if this is not in their best interest.  Also, unless there is a cap in free tuition, public colleges will lose the incentive to be cost-efficient thus risking unchecked growth of costs.  Another unintended casualty might be vocational education that could generate better income results than college education for many young people who are less inclined to do academic work or are more gifted in other types of jobs.  Free public college education could very well crowd out vocational education unless it also gets a cost relief.  Private colleges will also face stiff competition.  On the other hand, reducing the ranks of marginal private colleges will allow those that provide a value-added educational experience over and above that found in public universities to strengthen their position.   Like the need for affordable care, affordable higher education is sorely needed but it will require long and careful thinking and design if it’s going to work as intended.

Even if we make progress in leveling the playing field for college education, the challenge we still face is how we prepare more students for a college education.  That requires our prime and secondary education become less unequal in the quality of education they provide across the many school districts.  Unless we also reduce inequalities in pre-college education, the candidates that enter the halls of higher education each year will misrepresent the demographic profile of the country.  This is a story for the next post.

Talking about socialism has never made most Americans comfortable.  Equating it with communism has rendered socialism a “dangerous”, even unamerican idea.   This taboo was broken in 2016 when Bernie Sanders openly campaigned as a Democratic Socialist.  In the 2018 mid-term elections, other candidates campaigned and won under the mantle of democratic socialism.  And by a slight majority, millennials have a more positive perception of socialism than capitalism.  It’s time, therefore, we talked about socialism like mature and informed citizens and not like cynical politicians.

I have written before that ours is not a pure capitalist system.  It hasn’t been for a long time.  Elements of socialism are all around.  More importantly, our capitalist system is not exactly the type we read about in textbooks.  Beyond any impurity brought about by socialist programs, our capitalist system suffers from afflictions of its own doing.  Consider, for example, cronyism (the corruptible influence of lobbyists and the revolving doors from business to regulatory agencies and back to business) plus plutocracy, and kleptocracy.  (About the last two, I refer you to “How Kleptocracy Came to America” in the March issue of Atlantic – link below)

https://www.theatlantic.com/magazine/archive/2019/03/how-kleptocracy-came-to-america/580471/

That doesn’t mean American capitalism is deep across the board in any of the above maladies.  The fact is, however, that despite a well-functioning justice system, laws and regulations, economic interests (corporate and personal) often distort the playing field at the expense of most of us.  Here is a sobering statistic.  In 2018, the US ranked only 22^nd in the Corruption Perception Index compiled by Transparency International.  Greater infusion of socialism may not necessarily improve the US standing, since corruption can occur in any system, but we should take note of the fact that #1 in the rankings was socialist Denmark.

So, how would we appraise our economic system?  American capitalism does a very good job in creating wealth.  Our economy usually exits recessions faster than other economies and often grows faster despite its mature state of development and size.  American capitalism also has an unique ability in inventing new products and services.  However, it is in the distribution of wealth and incomes that our economy has taken a less fair path over the last 40 plus years.  Indeed, average real wages (wages measured in purchasing power) have remained the same since 1972 (Pew Research Center).  As surprising as it may sound there is not one intervening year in that period when average real wages surpassed the 1972 level!  Income growth has been the privilege of the top 20-25% of Americans, while the proverbial 1% has hogged the lion’s share.  Whereas from the 1940s to the early 1970s wage growth matched the gains in labor productivity (output per work hour), in contrast, between 1973 and 2013 wages grew by a total of 9.2% while productivity grew by 74.4% (Economic Policy Institute).

Undeniably, something happened after the 1970s that depressed the growth of wages and accelerated the growth of capital and business profits.  One culprit is the declining bargaining power of labor unions.  Thus, income inequality certainly originates at the point where wages and profits are produced.  But then it becomes worse through a tax system that in many ways favors high earners and the wealthy.

These developments are not unrelated to the distinctly different stands the two main American parties have taken with regard to the production and distribution of income and wealth.

Republicans tend to emphasize the importance of production whereas Democrats tend to emphasize the importance of distribution.  The productive capacity of an economy is important because unless gross domestic product (GDP) rises at the same or higher rate than the population living standards will decline.  To Republicans it is expansion of the pie (GDP) that matters, not how we split the pie.  To this effect, they favor lower taxes for incomes from capital and business and policies that allow less restrained utilization of labor and natural resources.  Republicans defend the 2017 generous tax relief to wealthier Americans because the expansion of GDP has given more people (many of them minorities) jobs and incomes.  That is, working class people as a whole are earning more than before. This argument, of course, ignores the fact that in nominal and relative terms the top earners and wealthier Americans are even greater winners.  Republicans also believe that each one of us creates his or her opportunities and success or failure.  (Though the recently revealed college admissions scandal shows that opportunities can be also bought.)

Democrats care more about how we split the pie.  To Democrats, income distribution is equally important because uneven reward of labor and capital prevents some segments of the population from enjoying their fair share of the economic output and can breed social unrest.  Democrats see the strength of the country in a social contract that balances the interests of labor and business and safeguards the sustainability of the environment.  They also believe that the state has a duty to improve the opportunities and, hence, chances for success of those who may not be lucky enough to be endowed with the conditions for either.

Beyond any appeal to fairness and social peace, the data show that unfair income distribution and lack of an adequate safety net can cause serious social ills.   Despite the fact the US is the richest country, its standing in critical social indicators lags that of other countries.  Consider, for example, that in poverty, infant mortality, life expectancy, reading and math skills, health insurance coverage our rankings are far from stellar.  These poor results are directly related to income inequality and inadequate protection of the weaker and less lucky among us.

It is this gap between our capacity to produce wealth and our commitment to use it properly in the interest of the common good and welfare that the socialist talk of Democrats is all about.  It is a discussion well having.  And as for those who want to disparage it, they should then have the moral courage to do away with the socialist benefits they enjoy:  Social Security, Medicare, Medicaid, lower than otherwise home mortgage interest rates and so many more.

About 3.4 miles off the western coast of Turkey, in the eastern Aegean Sea, there lies an island.  For its forested mountains the Hittites called it Lazpa.  The Greeks who came there over 3,000 years ago pronounced its name Lesbos.  These days, Lesbos is also known as Mytilene, its capital city.  In antiquity, Greeks and Romans knew Lesbos because of its poets, its people of letters, and its olive trees.  Nowadays, people around the world recognize its name because of the thousands of refugees, who fleeing the wars of the Middle East and Afghanistan, crashed drenched, frightened, and uncertain on its shores.  The image of a little boy swept dead on the Turkish shore across Lesbos still epitomizes the human drama of seeking a new home away from home.

It’s not, however, the mark Lesbos left on the early years of the 21^st century the only reason I want to write about this island.  It’s more than that.  Coincidence or fate has made Lesbos relevant to our lives like few other places.  Connecting the dots of the history of Lesbos, even though one dot was not consequential for the next, is a story worth telling.

The dots start with the birth of Sappho around 630 BCE.  The ancients called her The Poetess for the beauty of her lyric poetry (the only female to be called that just like Homer was the only male poet to be called The Poet).  Along with her compatriot Alcaeus, Sappho was recognized as one of the nine greatest poets of ancient Greece.  Some called her the tenth Muse.  Her lyricism inspired many, including Roman poets and, much later, European writers once she was discovered again in the 16^th century.  The passion of her poems, especially when she rhapsodizes of female characters, made her the first poet of female homoerotic love.  That’s where Lesbian came from.  Very little of her poetry survived the vicissitudes of human history.  Here is the last stanza of her Ode to Aphrodite:

“Come to me once more, and abate my torment/  Take the bitter care from my mind, and give me/ All I long for/  Lady, in all my battles/  Fight as my comrade.”

Sappho was not the only great poet from Lesbos.  In 1979, Odysseus Elytis, whose parents hailed from Lesbos, was awarded the Nobel Prize in literature.  Those who have sailed across the Aegean will recognize these islands in Elytis’ verses: “Ios, Sikinos, Serifos, Milos/  Each word and a swallow/  To bring you the spring amidst the summer”.

In the centuries between Sappho and Elytis, Lesbos became host to another great.  Aristotle arrived in Lesbos in 344 BCE and stayed there for two years.  There, the lagoon in the bay of Kalloni became Aristotle’s laboratory for the study of its aquatic and aviary life.  One of the species was the cuttlefish.  Aristotle dissected this and many other species, describing their anatomy and the functions of their organs.  Beyond fish and birds, Aristotle studied mammals, including humans.  His methodology for classifying animals into genuses and species was surpassed only by Karl Linnaeus’ taxonomy in the 18^th century.  In his book The Lagoon the biologist Armand Marie Leroi (of the Imperial College of London) offers a fascinating account of Aristotle’s observations, methods, and connections of his work to modern zoology and biology as well as the theory of evolution.  As modern scientists do, Aristotle raised many research questions and, following a system of logic, gave answers that were insightful, albeit often erroneous or half-right.  He wrote “nature makes [animal] instruments to fit the function, not the function to fit the instrument”.  In other words, he understood that animals must be fit to survive their environment.  He wrote that off-springs inherit their species and traits from their parents.  Thus, he understood that procreation is the passing of genetic information from parent to off-spring.  He did not go as far as to understand the role of adaptation in evolution, but he wrote that differences in species are gradual – or that nature evolves in small steps.  Armand Leroi argues that Aristotle came tantalizingly close to grasping natural selection as the evolutionary mechanism in the development of life.  It’s not too much to claim that Lesbos is the place where biology was born.

Lesbos would continue to be remembered only for Sappho, Aristotle, and its connection to Elytis if it were not for the Arab spring, the rise of fundamental Islam (ISIS) and the Afghan war.  It was the confluence of these conflicts that broke all hell loose. In just 2015, over a million refugees crossed the Mediterranean toward Europe.  Of these, 800,000 came to the Aegean islands across Turkey, with the majority landing on Lesbos.  We all know the scenes of despair, bravery, and tragedy that unfolded as worn out men, women, and children tried to survive on rickety boats and make it to the shore.  In an epic journey of hardship, sorrow and endurance these hundreds of thousands of refugees made their way to the Greek mainland and by various means to the lands north of Greece, seeking to ultimately reach Germany and other affluent European states.

While hundreds of volunteers from all over the world converged to Lesbos and other islands to help the refugees, the dark side of human nature reared its ugly head as hostile nationalist sentiments rose in European countries.  One after the other, Slovenia, Hungary, and Austria closed their borders to the approaching refugees.  In Greece, the far-right party Golden Dawn found a new foil for its supporters.  Austria saw the rise of the nationalist Freedom Party while Hungary saw further consolidation of power in the hands of its undemocratic nationalist prime minister Viktor Orban of the Fidesz party.  Even in Germany, the Alternative for Germany (AfD) party attracted enough voters to raise a strong anti-immigrant voice and challenge Chancellor Angela Merkel.  The same in France and the U.K.  In this country, a presidential candidate launched his campaign by promising to seal the US from those criminal hordes of immigrants passing through the southern border.

Human migration is not easy.  Not for those who leave their homes or for those who see them before their homes.  But how we think of and treat immigrants and refugees is a test of our society’s character.  Humanitarian crisis is our failure to treat refugees humanely.  It is not our failure to keep them away.  Last October, Greek Coast Guard Lieutenant Kyriakos Papadopoulos was given a hero’s funeral for having saved 5,000 refugees from drowning in the Aegean.  And a few weeks ago, Dionysis Arvanitakis, a baker in the island of Kos, was memorialized at his passing for feeding the refugees. These and countless others understood human dignity.

That’s the story of Lesbos.  A legacy of poetic lyricism, scientific curiosity, and human strife for dignity.

I had finished writing my last post when Amazon announced that it was pulling out of its plan to open a corporate campus in Queens, New York.  What followed was an exchange of accusations and counter-accusations that came to echo the theme of that post about views that favor job creation over other interests.  In this case, the interests that felt aggrieved by the generous concessions to Amazon were those of the community living around Amazon’s future location.  The practice of government concessions to influence corporations and other organizations (like sport franchises) as to where to move their operations is well entrenched in America.  This practice raises, however, some inconvenient questions that are worth exploring, especially at a time when the debate about the roles of private and public sectors seems to be intensified.

First.  Why do firms ask (or even demand) concessions to choose a place for their operations?  Aren’t the other intrinsic location factors (like well-trained labor force, good educational institutions, efficient justice system, reasonable regulations and taxes, quality of life, and safety) enough?   Or is it that the prospects of making a profit aren’t strong enough so a firm needs concessions to turn an unprofitable business into a profitable one?  If it’s the first case, corporations appear to be greedy.  It looks like they practice corporate giving in reverse.  They place themselves at the receiving instead of the giving end.  If it’s the second case, the concessions granted by local governments enable firms to apply resources to businesses with questionable or perhaps negative economic value.  Neither possibility is desirable.

Two.  Why are local governments willing to grant concessions to attract firms?  Is it because they sense they cannot compete in locational advantages (like those mentioned above) and use concessions as the only competitive tool?  If this is the case, the practice of relocation concessions can very well enable a local government to systematically ignore the long-run development of its community.  Isn’t then that community right in demanding a more direct attention to its interests so that it develops a sustainable future?  Can the dedication of resources and time to develop sustainable locational advantages be a viable policy if business can be attracted through occasional concessions?

Three.  Negotiations on concessions are done on a case-by-case basis.  Hence, they are transactional.  They may favor some firms over others.  Thus, they may undermine long-term loyalty and long-term relationships with businesses.  These deals resemble marketing promotionals which promise new customers a preferential price while old, loyal customers pay higher prices.  Relocation concessions can also distort firm competition.  How can we justify this potentially distorting role of government?

Four.  Choosing to go to the city or state that grants the biggest concessions is no different than choosing to go to the country that has the most advantages for businesses, be it in the form of lower taxes, looser laws and regulations, cheap labor or absence of labor unions.  If relocation within a country based on concessions is a good thing for business, can we condemn firms for relocating or sourcing services abroad?  In both cases, the firms’ motives are the same: bring down the cost of business and increase profits.

In fact, the practice of government concessions to influence location decisions is an ideological orphan.  Advocates of pure capitalism consider them to be an unwarranted intervention of government in the domain of markets and private enterprise.  Liberals, on their side, consider them government handouts, a sort of corporate welfare.

Of course, those who believe that the main priority of an economy is to create jobs, whether the incentives originate with the market or the state, have no qualms about government concessions to attract business.  But their  cries of “job killers” to the opponents of such concessions cannot be done in the name of unfettered capitalism that disdains government interference in the economy.   Liberals are not free of ideological conundrums either.  They have to explain their rules and principles in relation to attracting businesses and jobs in their communities.

And for all of us, the relevant question is:  If local governments have a useful role to play, what are the fair rules of competing for businesses and jobs?  How can we avoid a “beggar thy neighbor” game?  Who has the right to be at the table of negotiations?

What is going on?  Is the US moving from capitalism to socialism because of Bernie Sanders and his acolyte Alexandria Ocasio-Cortez?  And what about going all the way back to 18^th century mercantilism the Trump administration seems to favor?

As I have written in a previous post, the American economic system is anything but pure and unfettered capitalism.  It’s a hybrid of capitalism and elements of socialism.  That was settled some 80 plus years ago with the New Deal legislation of the FDR administrations.  We got Social Security as well as the National Housing Act that made home financing affordable through government sponsored agencies that are still with us.  We also got a host of regulatory agencies that regulate trade, commerce, and the capital markets.  Nixon added the Environmental Protection Agency, and Johnson bested him with the Medicare, Medicaid and other safety net programs.  G. W. Bush expanded Medicare to cover drugs and Obama added the Affordable Care Act.  Since the late 1940s the employer-sponsored health insurance has been subsidized by not collecting taxes on that part of labor compensation.  Bailing out the Savings and Loan Associations industry in the 1980s and later the whole financial system along with GM and Chrysler in 2008-2009 brought the hybridization of our economic system to even a higher level.  And, surprise, surprise, we also have a sort of basic income in the form of the Earned Income Tax Credit to assist lower-income people.

In addition, the government is in the business of producing basic and applied research and supporting numerous research centers.  It is thanks to government involvement in space exploration (NASA) that a private industry of rockets and satellites has sprung up.  The internet with its transformative innovative extensions was also funded by the government in its nascent stages.

The above programs reflect the pragmatic view that for all its advantages and benefits capitalism needs oversight and assistance from government.  Private initiative is not willing or capable to meet all society’s needs and markets can fail or inflict harm without some regulation.  Not every American is fully aware of the hybrid nature of our system but overwhelming majorities are happy with these programs, especially Social Security, Medicare and Medicaid.   Not only that.  We now have a new political reality.  Socialism is no longer a dirty word.  Although Americans favor capitalism by a wide margin, they are warming up to socialism.  An August 2018 Gallup poll showed that 51% of Americans ages 18-29 are positive about socialism vs. 45% who are positive about capitalism.  Interestingly, the one thing both Democrats and Republicans associate mostly with socialism is that it promotes fairness (Sept. 2018 Gallup poll).

The fact that Americans understand socialism as a fairness-enhancing system has to do a lot with how capitalism has been abused to benefit the few.  Capitalism is quite a flexible system that comes in several versions.  Over the past 30 years, the version of capitalism favored by conservative thinking in the US is what I like to call paternalistic capitalism.  Democrats call it trickle-down economics whereas Republicans give it a respectable spin by calling it supply-side economics.  It can be summed up as follows:  A society is made up of job creators and investors on one side and all the rest on the other.  Job creators need to have freedom from regulations and labor restrictions (like labor protection laws and unions) and above all pay low taxes.  When these conditions are met, the job creators will hire workers, produce and sell a lot of stuff, and even pay good wages.  If, under this arrangement, the business/investor class gains disproportionately more is of secondary importance as long as all others also get something.   Therefore, the proponents of this arrangement view it to be a win-win solution.  Except that it doesn’t work like that.  The record shows that absent regulations, workers and consumers are often abused and tax relief to the wealthy and businesses does not necessarily translate into investment in factories and R&D or into higher wages.

The idea that the economic well-being of a society primarily depends on the financial strength and enterprising initiatives of existing and aspiring job creators is just an economic dogma reflecting the political choice and power of one group.  It doesn’t even accord with true capitalism.  A sustainable economy needs both the demand side and the supply side to operate efficiently.  The paternalistic version of capitalism instead espouses that government policies should systematically be geared toward privileging the supply side by all means.  Exhibit A of this dogma is the 2017 tax law.  With the economy near full employment at that time a tax stimulus was hardly needed.  What was sold as a tax reform instead turned out to be a tax bonanza to already very well-off people and to corporations.

The second reason why capitalism is losing the people’s faith is the increasing income and wealth inequality.  The success of an economic system is not judged only by its ability to produce wealth but also by its fairness in distributing wealth.  Psychological experiments show that humans are not merely content to gain something from some arrangement.  They also want to feel they are treated fairly.  It is understandable then why Americans feel that the type of capitalism they experience does not work fairly for all and, hence, they perceive socialism to be fairer.

However, as we worry too much about the intrusion of socialism, Mssrs. Navarro, Lighthizer, and Trump are working hard to turn us back to 18^th century mercantilism.  Mercantilistic policies favored exports and restricted imports in order to produce positive trade balances that augment the gold reserves of the country.  France stuck too long to this policy and eventually lost out to England.  Likewise, the current administration’s fixation on bilateral trade balances risks ignoring other vital developments that will matter more for the well-being and global standing of the US.

Coming back to the mix of capitalism and socialism, or the roles of private and public sectors, we need to recognize that we face a complex and uncharted future of serious challenges.  Technological advancements, Artificial Intelligence, environmental sustainability, climate change, and biotechnology are some of them.  We have no idea how efficiently and fairly the private sector can handle these challenges.  Our success in navigating these and other challenges will depend on how smartly we use our private and government resources to solve human problems and not on the degree of purity of our economic system.

In 1998 the group of the top ten corporations in terms of market capitalization (market value of all shares) included four firms operating in the digital economy (Microsoft, Intel, IBM and Lucent Technologies).  In 2018, there were five of them and most importantly four (Apple, Microsoft, Amazon and Alphabet (Google)) occupied the top four positions.  Only three of the top ten firms had operations that could somehow fall in the traditional old-economy sectors of chimney stacks or brick and mortar firms.   This is one way to understand the new structure of the economy.

There is, though, another more interesting dichotomy that has serious implications for employment and incomes.  This is the dichotomy between high-technology and low-technology sectors.  The importance of this dichotomy comes from the fact that technology intensity is closely related to productivity (value of output per worker); and productivity is in turn related to the level and growth of wages.  This point was brought home again in an informative article by Eduardo Porter in the NYT (2/5/2019).  The data, drawn from businesses operating in Phoenix, AR, show the gap in wages between low-technology/productivity sectors on one hand and high-technology/productivity sectors on the other.  There is no reason to doubt that this split also exists across the US economy.  For example, Porter’s article shows that in 2017 a person working in the accommodation and food services sector received an average weekly wage of $420 whereas a person working in the information sector earned an average weekly wage of $1,450.  The latter worker’s productivity was 6.22 times that of the former.

As we would expect, when technology plays a lesser role in the production of products and delivery of services, firms need to hire more workers (i.e., more hands like sanitation workers or brains like educators).  The opposite is true in the high-technology/productivity sectors.  The result is that a lot more people are employed in low-technology sectors than high-technology sectors.  This implies that when we hear that employment rises and unemployment falls the opportunity to earn relatively high incomes is not the same for all new hires.  Since a lot more people are hired in low-technology/productivity sectors where wages are lower, that depresses the overall average growth of wages.  And this explains why despite the emergence of new professional fields with high wages, the majority of Americans are not enthusiastic about their earnings.

Not only high-technology/productivity sectors employ fewer people they also have a serious barrier to entry for aspiring workers:  they require high-skill sets that come with advanced education (at least a bachelor’s degree or specialized technical vocational training).  The data show that college graduates (whether white, Hispanic or black) make twice or more the income of non-college graduates within each demographic block.  The insufficient career preparation of white non-college workers (that comprise the white working class) and their resentment against educated elites is not actually helping them to escape low-wage jobs.  And any politician’s pledge that he/she will restore the good old wages of working-class people is either ignorant or an outright lie.  No politician can affect the productivity of a sector when productivity is related to the nature of the job and the technology intensity that goes with it.

And there is more bad news for less-educated working-class people.  Firms are moving fast in adopting technologies that displace low-skill workers.  You may have read a NYT (1/26/2019) article “The Automation Agenda Hidden by the Davos Elite” which reports that although executives are loath to declare the move to technology (for fear of upsetting their workers) in reality they are doing exactly that.   The above-mentioned Porter article also reports that academics now fear that the expectation that technology and Artificial Intelligence would help create enough jobs at good wages to replace those lost to technology is no longer justified by the recent data.  Therefore, the concern of mostly white working-class Americans that they lose wages to immigrants is misplaced.  The real culprits are technology advancements and lack of the requisite skills that force these workers to low-productivity and, hence, low-income jobs.

What should then be done?  Thoughtful experts recommend that the government must play a greater role in assisting working class people to retool for the thriving sectors of the economy.  Besides college education, support and promotion of vocational education in fields needed in the knowledge-driven economy are extremely important in that connection.  There is a big difference between being willing to escape the low-wage economy and not being able to do so for lack of means or social support that local and federal government programs can provide.  Sending the unemployed coal miners of West Virginia and Kentucky back to coal dust filled mines leads to a life of precarious health and uncertain employment future.  Sending them to computer and robotics classes is the right thing to do if we truly care about them.

The bi-furcated economy we face raises a number of political questions.  If indeed the increasing application of technology does not lift all boats and a non-trivial fraction of workers stagnates in low-wage sectors, is this healthy for the social cohesion of the country?  If we fail to train more American workers for the technology-intensive jobs, who will fill the gap?  The obvious answer is that we need to have a policy to attract foreigners with the needed skill sets.  Currently, we seem to go backwards in this respect.   On the other hand, if we succeed to train a lot more people for the technology-intensive sectors, who will fill all those low-wage but necessary jobs?  This points to the need for an immigration policy that welcomes workers from less developed countries.  Since American low-wage jobs still pay a lot better than low-wage jobs in underdeveloped countries, this is a win-win solution.

Economic trends in technology utilization, employment needs, and labor incomes suggest that we need to have an informed debate about their consequences instead of exploiting these issues to advance narrow political goals.

In the mid-1980s, Great Britain seemed to be a lot more confident about its potential and future.  At least that’s what was reflected in the policies adopted by its Prime Minister, Margaret Thatcher.  With her faith in market-based economics, she privatized big state companies, like BP, and then, with her “Big Bang” deregulation of capital markets and the financial services industry, she showed that Britain was ready to compete on a global scale.  Indeed, London became an early beneficiary by quickly becoming a world-class financial center, ready to rival New York’s Wall Street.

The fact that traditional, centuries-old, investment banks, were taken over by American and continental European financial institutions did not seem to raise particular anxiety.  After all, as a result of London’s internationalization, multitudes of professionals in law, finance, accounting, and other ancillary fields added to London’s economic vitality and heft as a cosmopolitan financial heavyweight.  London’s growth was also evident in its fast-changing skyline as new glittering buildings were added to house international firms.  Similarly, the Great Britain of the 1990s had no problem of welcoming the excess labor force of less developed European Union countries after the adoption of the Maastricht Treaty that opened up the labor market in the EU.  Great Britain and London, in particular, became the destination for talented and ambitious young professionals from all over Europe.

But then, a decade into the 21^st century Great Britain started to lose its nerve.  On one hand, the financial crisis of 2008 was pushing more displaced Spaniards, Portuguese, Greeks and other Europeans to seek work in England.  On the other, a more disturbing development to many British people was the influx of Middle East refugees into Europe as a result of the wars in that region.  The passport-free crossing of the channel by non-European, mostly Muslim, migrants became the bete noire of fringe right-wing groups before it metastasized in more politically correct language to mainstream segments of the population.  Around the same time, the EU rules made in Brussels also started to leave a bad taste in the mouths of British politicians that should know better as to how a multi-national union was supposed to work in order to keep its cohesion.  In short, politicians and people of influence, many of whom had come out of the elite schools that until a century ago had graduated those who ruled over Pax Britannica, all of a sadden turned against internationalization.

There is a historical irony in this closing of the British horizons in the minds of the British, especially its elite.  Throughout the colonial times, the British were active in subjugating other people, rearranging their lives, destroying traditional social and political structures, and introducing new customs and cultural norms.  But the moment these former colonial masters realized that they themselves ran a real or fantastical risk of having their lives been impacted by foreigners, be it the rule-makers of Brussels or European workers or Asian and African migrants, they dug the moat around fortress Britannica by approving the Brexit.  The up-to-that time internationalization of their frontier was now the threat.

Lest I am unfair to the British people, let me add that the same irony applies to Western Europe as well as to America.  Western Europe, starting with the Crusades and continuing with the colonization or outright conquest of new lands played an immense role in upsetting the lives of people from the Americas to Far East Asia.  Western Europeans spread their religion, customs, culture, political institutions and so much more, besides spreading deadly diseases.  Whether the spread of European influence and hegemony were beneficial or not is besides the point.  The lives of so many people were changed by European colonizers and settlers most often against the will of the local population.  Now people from these same lands are coming to Europe, not as armed invaders, but as desperate migrants attracted to Europe’s success and peace.  All of a sudden being exposed to other cultural influences, to this reverse direction of globalization and multiculturalism, annoys to say the least, or even worse, raises nasty nationalist sentiments that feed the ranks and the clamor of right-wing parties across Europe.

We see the same historical irony in contemporary America.  Sometimes by military and other times by political means, we have interfered in the domestic affairs of foreign people, most frequently those of Central and South America.  Just like earlier generations of Europeans, Americans believed their engagement in the affairs of others were for the purpose of setting up a better world order.  But there is no denying that our interference impacted other peoples’ lives when many of them would rather be left alone to sort out their mess.  Central to America’s message as it engaged in global affairs was convincing others about the benefits of economic opportunity and the right of people to free and safe living.  Many of these people realizing that neither was possible in their countries kept coming knocking on our borders eager to pursue the goals we preached to them.  But now we want to raise walls to keep them out.  Having been responsible for changing the lives of others, we are now afraid of any change they may mean for us.

Being honest with our historical past means we recognize that we are often those who set in motion the forces that now bedevil us.  Those who see foreign people as a menace to their lives, from a political, cultural, or religious standpoint, ought to realize that that was the threat we posed to them in the name of global and cultural expansion.  Grasping our historical interaction with other people should inform every European and American citizen that showing tolerance to those whom we brought into our own world of global order is the least we can do to save our honesty.

In my previous post I wrote that firms may not necessarily be run by managers in ways that reflect the interests of the shareholders, and this separation of control from ownership can lead to sub-optimal economic outcomes.  Here I will argue that the current trend of statements by politicians, commentators and even business leaders regarding the mission of firms has a high risk of missing the mark and moreover create adverse consequences that could erode the role of government and the balance between manager-controlled corporations and the public, in addition to causing economic inefficiencies.

Here are some examples that feed this controversy.  Larry Fink, head of BlackRock, a huge wealth management firm, has admonished business leaders to take a leadership role in public affairs, be it of social or political content.  David Brooks, as I previously mentioned, laments that economic priorities have overtaken social priorities in the decisions of corporations.  Microsoft recently announced the commitment of $500 million to mitigate the high-cost of housing in Seattle.  A Deloitte survey found that millenials overwhelmingly chose “improve society” as the goal of firms.

To assign the duty of social responsibility to firms is fine, but it also needs clarification.  Firms do have a socially responsible purpose and this is to meet human needs by producing honest products and services and selling them at fair prices.  From getting a haircut to getting a life-saving medication we rely on small or large enterprises we generically can call firms.  Making a profit is only a condition for a firm to stay in business and remunerate those that provide its capital.  Unless we start with this purpose in mind, we risk taking our eyes away from ensuring that firms deliver the products and services they promise and compete fairly in setting prices.

What about, however, other priorities, like supporting charities, civic associations, cultural institutions, education, research?  That is, how about using the firm’s money to support the community and society at large?  That’s where the difficulties start?  Who has the right to make these choices?  The managers or the shareholders?  In an often-cited article published in the NYT in the 1950s, the late economist and Nobel Prize winner Milton Friedman argued that managers should concentrate on making profits and let the owners decide on how they wish to use (or not use) their profits for social causes and charities.  Friedman’s suggestion makes sense.  Managers cannot tell what charities or social causes all shareholders favor.  Therefore, managers should abstain from using firm resources for such ends and instead let each individual shareholder decide for him/herself.  Besides, managers may direct firm resources to charities and causes that build social capital for the manager without necessarily creating commensurate benefits for the firm or the shareholders.

No matter how honest firms may be in regards to their products and prices, their operations can have adverse consequences on their communities.  Concentration of firms in an area may drive housing costs up, congest traffic, pollute the environment, even invite criminal activity.  These are what economists call negative economic externalities.  Don’t firms have an obligation to bear some of the public cost of these externalities?  This is the question asked by E. Tammy Kim (NYT 1/19/19) in discussing Microsoft’s commitment to alleviate housing costs in Seattle.  Her suggestion of levying a tax to defray the cost of corporate negative externalities may sound controversial but it’s a good start in addressing the impact of large corporations on the quality and cost of living.

In the same newspaper Emily Badger worries that if we accept types of initiatives like that of Microsoft’s as the new model of corporate giving, we risk transferring core public sector responsibilities and policy decisions to corporations.  This not only erodes the scope of government, it can also undermine the principle of democratic representation.  Besides shareholders whose social or political priorities may not be fairly represented by managers, voters as well can be frozen out of the process of deciding how various community problems ought to be resolved.  Take this model to its logical extensions and we may very well end up with a corporatist governance.  Again, the main concern is not whether corporations should have a role in shouldering public costs, but what form the cost sharing should take, as, for example, in the form of taxes, with public sector institutions maintaining authority over the decision-making process.  As with Milton Friedman’s suggestion, let corporations operate in their business sphere (i.e., produce, sell, make profits, pay taxes) and let governments take care of public problems.

The 2010 Supreme Court decision on Citizens’ United, which recognized free speech rights to corporations, is also pushing corporations toward actions outside their business sphere.  The concern here is not about the legal validity of the decision.  It’s rather with the opportunity the case opens for corporations to interject themselves in the electioneering process under a corporate governance model that potentially allows political speech to reflect the views of managers rather than those of shareholders.

Although shareholders as owners of the firm have the ultimate right to decide how its resources are used, giving primacy to the voice of shareholders does not necessarily solve the problem of fair representation in decisions of social or political engagement by firms.  Today, the vast majority of public shares are held by institutional investors, like pension and mutual funds, trust funds (of universities and other non-profits) and hedge funds.  The shift from individual to institutional stock ownership means that these institutions may not vote in the interests, economic or political, of the owners (i.e., us) of the stocks they manage.   Increasingly, the power to make or affect corporate decisions that go outside the business sphere rests with a shrinking pool of decision makers.  And yes, individual shareholders can mount efforts to have their voice be heard but this can be often done at a prohibitive cost.  And lest we forget, many voters are not shareholders.  How are they represented in the social and political decisions of firms?

As this discussion shows, the call for corporate social responsibility outside a firm’s business is fraught with problems and challenges that can impact economic prosperity and the political process.

All my academic life I taught finance courses or what we often call “bean counting” courses, difficult to relate to lofty ideals.  But when I would first meet each new class, I strove to find some inspirational words to link their effort and lives to the bigger world as a way to motivate them to do their best.  In one such opening class, as I was trying to find this bigger theme, I told them to be dreamers and to dream big no matter how challenging the dream appeared to be.  And then without much thought I told them “think what a collection of bold and challenging dreams were those that Martin Luther King proclaimed that summer day on August 28, 1963.”  It is a whole different experience to listen the “I Have A Dream” delivered with King’s thunderous and commanding voice, but reading the words delivers the same powerful message.  Here is that section of the speech:

… I still have a dream. It is a dream deeply rooted in the American dream.

I have a dream that one day this nation will rise up and live out the true meaning of its creed: “We hold these truths to be self-evident: that all men are created equal.”

I have a dream that one day on the red hills of Georgia the sons of former slaves and the sons of former slave owners will be able to sit down together at the table of brotherhood.

I have a dream that one day even the state of Mississippi, a state sweltering with the heat of injustice, sweltering with the heat of oppression, will be transformed into an oasis of freedom and justice.

I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character.

I have a dream today.

I have a dream that one day, down in Alabama, with its vicious racists, with its governor having his lips dripping with the words of interposition and nullification; one day right there in Alabama, little black boys and black girls will be able to join hands with little white boys and white girls as sisters and brothers.

I have a dream today.

I have a dream that one day every valley shall be exalted, every hill and mountain shall be made low, the rough places will be made plain, and the crooked places will be made straight, and the glory of the Lord shall be revealed, and all flesh shall see it together.

Much progress has been made in matters of race but more remains to be done.  On this Martin Luther King day, let’s not only remember his words; let’s contribute to making his dream reality.

When policy pundits and politicians are frustrated with corporate America, their typical foil is the “shareholder culture.”  By that they mean that shareholders compel managers to serve shareholder interests at the expense of other stakeholders, including employees, customers, suppliers, and the community at large.

For example, last November, NYT columnist David Leonhardt wrote that in the 1970s managers decided to adopt shareholder value maximization as a corporate mission and as a result all kinds of bad things followed after that.  The truth is that in the 1960s managers had engaged in a value-destroying spree of corporate acquisitions in the belief that conglomeration was a more profitable strategy than focusing in a few related business lines.  Academic research, both theoretical and empirical, has shown ever since that the “empire building” strategy actually destroys economic value for shareholders and the society at large.  Educated by these findings active shareholders pushed executives to pay more attention to value.  They have done this by selling off shares of underperforming firms and/or bidding for equity stakes large enough to enable them to exert enough influence over or even to oust directors and executives that waste resources.

Last week, another NYT columnist, David Brooks, wrote “But these days corporations see themselves as serving one purpose and one stakeholder  – maximizing shareholder value.”  First, we should have the courage – no matter how difficult and controversial it has become these days – to say that there is nothing wrong (given certain caveats) with creating value for shareholder.  Unless the buyers of corporate equity (stock) are not compensated for the time value of money (i.e., the interest rate that they could otherwise receive on bank deposits) and the risk they take by investing in businesses with uncertain payoffs, there would be no equity capital to fund firms.  Neither financial theory nor best practices in corporate management teach or support that the interests of the shareholders are in conflict with the interests of other stakeholders.  Corporations (as all firms) generate more value by producing good products and services and expanding their markets.  They can undermine both if they try to shortchange their employees, creditors, customers, suppliers and their communities.  A firm can serve well all these stakeholders and still pursue value maximization through economic efficiency and successfully meeting the needs of consumers.  We have numerous examples of corporations that ran afoul of the law or the trust of customers and other stakeholders and saw their reputation and value suffer.

The more important question to ask is: Do corporations pursue value maximization objectives in order to meet the expectations of shareholder while treating fairly the other stakeholders?  To answer this question, we need to look at the structure of the modern corporation.  The shareholders as contributors and owners of the equity capital are given the right to run the firm.  The shareholders elect a board of directors, which then appoint the CEO.  Both the directors and the CEO act as agents, that is, as representatives of the shareholders and, by law, they have the fiduciary responsibility to act in the interests of shareholders.  In practice, this structure gives directors and managers effective control to run the corporation in ways that may not always be consistent with value creation.  Why is this so?  Because no one shareholder can monitor the actions of the CEO and hold him/her fully accountable.  To do so it takes significant resources, expertise, and time.  Someone like Warren Buffet can do it; but not you or I.  In practice, the rest of us rely on our pension funds, mutual funds, and activist investors to ensure managers and boards protect our interests as shareholders.  This separation between ownership and control has been recognized by Berle and Means since the 1930s.

Why do we need protection from CEOs?  Because if they only receive a base salary, they have a personal interest to also accumulate various expensive perks (like a private plane, generous car and travel allowances, etc.) with the cost of these perks coming out of the shareholders’ pockets.  More importantly, CEOs may avoid business decisions that could create value but could also threaten the CEO’s tenure or compensation.  The solution to this so-called “agency problem” is to give CEOs (as well as directors) shares of the corporation or options to buy such shares so that their financial interests are better aligned with the pay-offs of the shareholders, which are dividends and stock value appreciation.  This trend started in earnest after the 1980s and with the aggressive push of executive compensation consultants has led to the astronomical executive compensation packages of our days.  There is no credible theoretical or empirical support as to whether the extravagant CEO compensation packages are truly warranted, which speaks to the power of top executives.

One source of this power is the influence American CEOs have in the selection of the individuals who serve on the board of directors.  Furthermore, American CEOs almost invariably serve as chairs of their boards.  Thus, they control both the agenda and the dynamics of board deliberations.  It takes a lot of courage and conviction and often a lot of CEO malfeasance for an individual director to go against a failing CEO.  And even when CEOs are let go, they go with outrageous financial packages as a severance consolation even when they deserve to be fired.  Think about it.  In what other job, employees demand extra compensation in order to do their work as warranted by the employment contract?  As a British executive compensation expert once quipped, only in America executive income is called “compensation” instead of the English term remuneration as if American executives are told to do such thankless work for which they have to be compensated!

The truth of the matter is that American CEOs consistently resist rules that give shareholders a stronger voice and restore their right to act as full owners.  If corporate America needs improvement in its corporate governance is in regards to making corporate decisions more democratic rather than to diluting shareholder rights vs. those of managers.  Although there is more to this story, condemnation of the “shareholder culture” while ignoring the powerful role and lack of full accountability of executives fails to steer us toward the truly relevant issues.

Note:  Part II will address some of these issues.