Let's Reason

Looking across the globe, from China to Brazil and from America to Russia, we see businesses of all forms and sizes that operate with less or more interference of the state, and more or less regulatory and legal restrictions.  But all businesses experience the same common condition: they cross paths and live within a network of markets.  It is in the marketplace they sell their products; they find their employees; and raise the capital they need to fund their operations.

Given the ubiquity and indispensability of markets, it is not surprising that their quality is the main factor by which we also judge the quality of an economic system.   The fact that markets are the ground where unethical even criminal business behavior takes place leads to frequent criticism of markets as if they were the actual moral agents.  Markets, in reality, are mere mechanisms that bring parties together and facilitate a trade or transaction.

As a social institution, markets are artifacts of human design.  Thus, they can be designed to function efficiently or to function poorly.  For example, restricting competition prevents buyers and sellers to arrive at a fair price.  But the quality – or “integrity” – of markets also depends on the integrity of the buyers and sellers.   Good markets result when market participants are honest and trustworthy.  So, when I am about to sell you my used car, do I disclose to you what repairs my car has had so far?  That’s where personal ethical responsibility comes into place.  Thus, to preach something like “make markets moral” misses the point unless this admonishment means “make market participants behave morally”.  But market participants do not always behave honestly.  Therefore, we need to have laws and regulations to ensure markets work with more not less integrity.

Interestingly, even in the absence of laws and regulations, markets, like living organisms, can defend themselves as if they had an immune system.  Although, they can be corrupted (infected) by bad participants (the bacteria or viruses) they can also counterattack in order to prevent the infection from spreading or becoming endemic.

Thus, if corporations try to manipulate information about their operations in order to boost the value of their shares (the overvaluation infection), when the true information comes out, share prices collapse even below their fair level due to the loss of the market’s trust.  This happened in the case of the dot.com mania of the late 1990s that led to the burst of the stock bubble in 2000.  Managerial malfeasance and irresponsible or misguided forecasts by analysts had pushed prices to fantastic levels disconnected from reality.  The same way, lenders (like banks) that are stiffed by borrowers, or bondholders that are stiffed by bond-issuing firms refuse to do business with such unscrupulous borrowers.  Sometimes, investors are unable to tell which firm’s stocks, bonds or loans can be trusted.  In that case, investors reduce or avoid their participation in the market for such financial instruments across all firms.  The most serious case was that of the disappearance of the market for mortgage-backed securities in the wake of the housing market collapse in 2008.

Other times, the malfunction affects the product markets because of unethical business practices.  False advertisement, subpar quality of products or poor delivery of services can betray the consumers’ trust and cause losses.  Again, reaction by consumers is the only way a market can cleanse itself from bad participants.

Markets also can discipline firms that adopt or foster a culture of irresponsible actions related to how they operate.  The case of setting up fictitious accounts of unsuspected customers of Wells Fargo is an example.  In other cases, businesses have been accused of wrong doing in regard to the compensation, working conditions, or rights of workers.  Business practices related to the   environment and sustainability are also being subjected to scrutiny and ethical judgment.

In general, markets not only facilitate transactions, they can also serve as disciplinary mechanisms that allow participants and society at large to check the behavior of businesses when they are not honest about their value or their products, or fail to fairly treat their employees, their communities or the environment.  But to function as a disciplinary mechanism, markets need responsible participants who are willing to act on their values.

For a society to efficiently monitor and discipline businesses through the market mechanism, it needs to have enough information so that it can react appropriately.  To that effect, we need sufficient disclosure from law and regulatory enforcement agencies, from the press and other media, and even other private sources.  In sum, we need to have an unfettered system of information disclosure that exposes the behavior of market participants.

Even so, in some extraordinary cases, our choice about a market is reduced to a binary decision.  We either decide to enter a market or not.  The clearest example is Facebook.  The disclosure of news regarding the use of customers’ data and the privacy issues raised have created a lot of unease and resentment against Facebook.  But absent a real alternative, what choices do consumers have, if they want to be on a social platform?  Similar cases exist in other markets with extremely limited choices for consumers.  In such cases, the remedy may lie with political action that either regulates firm behavior or expands consumers’ choices so that the market can regain its disciplinary function.

In sum, ethical markets require that we behave ethically as market participants.  And for markets to perform their monitoring and disciplinary function, we need sufficient information about business behavior as well as people willing to act on this information.

But I need to add a cautionary note.  Because we can use the markets to reveal our economic, social and political preferences, it doesn’t mean each one of us will get the outcomes we like.  If the majority of people are indifferent to the environment, they will keep buying gas guzzlers (like SUVs) and there is nothing the market can do.  If enough people are willing to patronize a misbehaving firm, again, the market will not correct that.   As in politics, the integrity and disciplinary power of markets as well as the outcomes depend on the choices and morals individuals bring to the marketplace.

If you are part of an elite group (academia, wealthy, high-end professionals) most likely you live on the East or West coast of the US.  If you are a member of the fly-over country you reside in the states between the two coasts.  The story of the 2016 presidential election, we are told, was a revolt of the middle country against the elites.  Here are the titles of two columns by David Brooks in the NYT:  “The Strange Failure of the Educated Elites” and “What Rural America Has To Teach US”.  A Roll Call opinion piece included the following sentence: “People’s views of elites isn’t a passing fad.  It is an existential threat to government, political parties, the media and even business and academia”.  The views in these articles are worth exploring because we need to understand what separates elites from ordinary Americans.

In “What Rural America Has To Teach US”, David Brooks provides some interesting information about two towns in Nebraska, McCook and Grand Island.  Unemployment and crime are low, life expectancy is high, and, despite a sizable Latino population, residents do not seem to have changed their life styles nor do they feel culturally threatened.  On the other hand, incomes are not high, a high percentage of pupils qualifies for free school lunch, and many young people leave after they graduate from high school.  What caught my attention is the high degree of civic engagement in these towns.  This is worth noting because a 2018 article in The Atlantic described civic engagement in America to be in significant decline since the 1990s.  Brooks makes the widespread civic engagement of these towns a teaching point for the rest of us.  When I checked how the counties of these two towns had voted in 2016, I found that Donald Trump was their overwhelming choice, namely, by 83.2% in one county and 66.3% in the other.  Liberals would say that if civic associations are the laboratories of democracy with its emphasis on transparency, factual information and checks and balances, this voting pattern is rather inexplicable.

I tried to find statistics about the demographic profile of people engaged in civic activities.  A by now dated Pew survey from 2009 shows that urban and suburban Americans had a higher percentage of civic engagement than rural Americans.  More recently, a 2018 Pew survey found Americans with post-graduate and college education to have a much higher knowledge of civic matters than people with a high school or less education.  These findings do not support the view that elites – at least educated elites – fail to master or participate in the mechanics of democracy.  So, I wonder whether Brooks’ teaching point is valid.

Whether rural America can teach the rest of us is more complicated.  For sure some rural communities excel in civic life, living styles, work ethos, and so on.  But the data overall do not paint a picture of socially robust America in the fly-over country.  In a past column in the NYT titled “Blue States Do What Red States Preach” Nicholas Kristoff points out that in many indicators of social health, rural America is falling way short.  Teenage births, divorce rates, prostitution and adultery, early sexual activity, and child marriages are in general higher in red states than blue states.  In addition, rural America is ravished by the opioid crisis.  Interestingly, as Kristoff argues, it is conservativism that is responsible for the underinvestment in education and social services that contribute to these social ills.  Furthermore, conspiracy theories, end-of-the-world beliefs, creationism, denial of evidence of climate change, and other fantastical ideas find a very fertile ground with people of lower education and less exposure to the outside world.  One needs to read Susan Jacoby’s Freethinkers and Kurt Andersen’s Fantasyland to appreciate the extent of the problem.

What about the alleged failure of educated elites?  Brooks argues that educated elites have led ordinary Americans astray and instead they try “to pass down privilege to their children, creating a hereditary elite…”.  I would counter-argue that educated parents most often become role models for their children in regards to acquiring an appreciation for learning which mostly contributes to their succeeding later in life.  In contrast, children of less educated parents live in places of less affluence and often low appreciation of education and thus of fewer opportunities to make it in our knowledge-based economy.

Nonetheless, there are types of elites that fail to live with a balance of privileges and responsibilities.   For example, if we need to find a culprit for the hereditary passing of privilege to children, that’s the moneyed class.   But then how can I explain that the good people of Nebraska were so enthralled by a presidential candidate, like Trump, whose success and that of his children is exhibit A of hereditary privilege.  Wealthy Americans also exhibit an off-the-wall desire for extravagant life styles that, in my opinion, undermines society’s appreciation for middle class values.   I would also argue that the careers and financial success of many members of the elites, including high-end professionals, businesspeople, artists, and even academics, are often more closely linked to the global economy and trends than to what happens in middle America.  When our best customers and opportunities can be found abroad, we become less attuned to the needs of the more parochial fellow Americans.

Coastal Americans are more cosmopolitan and feel less threatened by foreign cultural influences.  Living in the midst of or close to immigrant communities, teaching foreign students, and doing business with foreigners makes us more citizens of the world than our working class or rural fellow Americans feel it is patriotic.  Loyalty vs betrayal is one factor in the matrix of moral foundations that according to Jonathan Haidt (The Righteous Mind) informs our political preferences.  Whether fair or not, the fly-over country perceives elites as less loyal to team America.  Add to that the fact that the ranks of our volunteer army are overwhelmingly populated by the sons and daughters of working class and rural families who thus become the protectors of the privileged lives of the elites.

Being or becoming a member of an educated, or ethnically diverse, or international business community naturally produces regard for fact-based discourse, receptivity to cultural diversity and endowment with broader economic opportunities.  Becoming a member of an elite by virtue of such conditions is the positive side of elites.  But using these associations to look down on others, promote hereditary rights, or display decadent life styles does separate one from the ordinary person.

Elites win society’s respect if they prove they deserve their status.  If the elites are to regain their credibility, they must become less smug about their success and show willingness to share more of the cost of being American.  Enlightened members of the elites must educate the bad and shellfish members of the group about their duty to think and operate with a more community-oriented spirit.

As I wrote in my last blog, opportunities for a decent education and a productive life are created long before young people decide what to do in their adult lives.  Before retiring, my wife taught kindergarten and primary school classes for 37 years.  For reasons unforeseen at the start of her career, she had the unique experience to teach in three widely different school environments that tell the story of primary education in modern America.

Her first public school district was in central Pennsylvania, not far from State College, the site of Penn State.  Back in the 1970s, the children of this district came from families of coal miners, truck drivers, other blue-collar workers, and some professional people. Their experiences of the outside world were limited.  The social ills that years later would become commonplace in rural America, like alcohol and drug abuse, divorces, out of wedlock births, had just started to take their toll on the social fabric of the local community.

Her second tour of teaching brought her to two exclusive private schools in Upper West and Upper East Manhattan.  There, the children’s parents worked in Wall Street or law firms or other top professions.   On Fridays, school would end early so the students could go to their country homes.  Every fall, they would come back to school telling their teachers the foreign cities they had visited during summer vacation.

The third and longest part of her teaching career took place in a minority suburb of Long Island.  The children came from African-American or fresh immigrant Latino families. They lived in modest homes or crammed apartments.  In the winter, some came without coats and they would do with whatever their teachers could find in the lost and found pile of clothing items.  The teachers would buy, with their money, crayons and blocks and the cupcakes and drinks for birthday parties and special days.  The same social ills that plagued the white rural district in Pennsylvania were the nemesis of these Long Island children.  Coming to school and been received by a smiling and affectionate teacher made their day.

The one type of school district my wife didn’t teach is the affluent small-city or suburban school district of mostly white families with their well-funded school budgets, their special programs, and impressive athletic and artistic facilities.

These four types of school districts occupy the spectrum of primary and secondary education in today’s America.  They stand apart in terms of race or wealth.  They are the result of a segregationist reality that the American society prefers to ignore.  The blame is not with the existence of private schools.  Actually, many parochial schools do not have more resources than peer public schools.  Despite the noble and sincere intentions of the “No Child Left Behind” law, American public schools produce unequal results across districts, states, and racial groups.  This topic is huge and I don’t pretend to know all that can elucidate its many dimensions.  But here are some of the facts that have come to my attention.

First, family background matters.  It matters for academic attainment as well as for a child’s adult life.  A recent NYT article “Data Zooms In on the Springboard to Prosperity” refers to research findings that show that students who attended schools in the same district attained different results as adults because of differences in family backgrounds.

Second, school funding matters.  Financially strong schools are able to hire more accomplished teachers, give them more teaching resources, and expose students to a wider menu of educational, cultural, and athletic programs and opportunities.  The Wall Street Journal reported that in at least 12 states school budgets are now below their 2009 level.  State data from the National Center for Education Statistics shows that quality varies directly with funding.

Fourth, attracting high-skill individuals to teaching matters.  Contrary to widespread belief, teacher salaries are not competitive enough to keep incumbents in or attract new teachers.  Erika Christakis, writing in The Atlantic reports that there will soon be a shortfall of 100,000 teachers.  The WSJ also reports that the teacher turnover ratio is at an all-time high as teachers leave for better-paying jobs.  As, years ago, job opportunities for women (who make the bulk of teachers) expanded into finance, law, medicine, and other professions, the relatively higher salaries of these fields attracted many female students that in previous times would have entered a teaching career.   Thus, unlike countries, as for example Finland, teaching has not been viewed favorably as a well-rewarding career in the US.  If teacher salaries were competitive by market standards, careers in teaching should be in high demand and turnover a lot lower than it is now.  So, the market test puts the lie to the argument that teaching is an easy career that need not be better remunerated.

Fifth, society’s regard for teachers matters.  Many working and middle-class Americans resent teachers by falsely believing that they earn disproportionate benefits thanks to their union power.  The fact that school funding comes mostly from local taxes feeds into this resentment.  However, the information in the previous paragraph suggests that even with unions teachers do not extract extra benefits.  Research has also shown that districts with strong unions perform better because unions help in weeding out bad teachers.  Demonization of teacher unions, non-competitive salaries, and inadequate support contribute to keeping competent individuals out of teaching.  Despite the misinformed view that public schools performed better in the 1950s-1960s, findings show that math and reading scores have improved while teachers are now faced with greater challenges as they have to teach more students from dysfunctional families or from non-English speaking families (E. Christakis, The Atlantic).

The current drive for charter schools risks pushing further back the public’s awareness and appreciation of education as a social good.  The individual’s right to seek the educational provider of choice (the charter schools’ argument) collides with society’s goal to offer all children educational opportunities that are as equal as possible with as little as possible regard to wealth and race.  If we neglect as a society to provide a good education to our children, we all stand to lose.  Social studies have shown that crime, broken families, alcoholism and drugs, poor earnings, and low work skills are the results of poor education.

The fact that government subdivisions, down to the local school district, are left with the power to administer the education of their children is not an excuse for all of us to turn away from the inequalities and poor results that afflict the less fortunate children.  After all, they are not responsible for what is delivered to them as public education.  As they grow into adulthood, these less educated children of America will deliver their indictment when they ask what their country has done for them.

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.