In Case You Missed It: The Strange Company We Keep

In Case You Missed It

In this issue, the VW emissions scandal and the unfettered market, school integration and mass incarceration, and giving poor people unrestricted cash.

 


The Strange Company We Keep

Oh Volkswagen, what happened? Let start with a cartoon from the Week:

 

In the Guardian, Will Hutton says the German car manufacturer's scandalous and possibly illegal decision to circumvent U.S. emissions tests for its diesel cars is evidence that global companies have become a law unto themselves:

So why did a company with a great brand, passionate belief in engineering excellence and commitment to building great cars knowingly game the American regulatory system, to suppress measured emissions of nitrogen dioxide to a phenomenal degree? Plainly, there were commercial and production benefits. It could thus sell the diesel engines it manufactured for Europe in the much tougher regulatory environment – at least for diesel – of the US and challenge Toyota as the world’s largest car manufacturer. Directors, with their bonuses geared to growth, employment and profits, could become very rich indeed...

Make your god the share price, as so many British and US companies do, and you create one basket of problems – under-investment, excess deal-making and cutting corners. Abuse the stakeholder system, as did VW, and make your god production on any terms, damning the concerns of outsiders as irrelevant, and your end can be equally grisly. Capitalism, in short, may have boundless creative and innovative energy – but it also has boundless ways to go wrong. Intriguingly, recent work by a group of researchers at Harvard and the London Business School compared 90 American companies that took sustainability seriously with 90 who did not. Over 18 years the 90 committed to sustainability delivered annual financial returns 4.8% higher than the other 90.

Meanwhile, NASDAQ's Martin Tillier says the market, not just the government, should punish VW. This news also comes amid outrage over what critics term price gouging by a pharmaceutical start-up, reports Barron's:

No conspiracy was necessary for the singular act of raising the price of a 62-year-old drug by more than 5,000%, to $750 a pill. That was the work, if one can call it that, of one Martin Shkreli, a 32-year-old former hedge fund manager who runs Turing Pharmaceuticals.

After the uproar that ensued from the publicity about the price hike, Shkreli went on network news shows to say there would be a rollback of unspecified size. But, in other interviews, he claimed the hike for the drug, Daraprim, would affect relatively few people...The events served to disprove the Gordon Gekko credo that “greed is good,” however. The utterly predictable political blowback that followed Turing’s drug-price hike knocked biotechnology stocks for a loop, with the group losing some $15 billion in stock market value.

In this Daily Beast story, G. Clay Whitaker looks at Hitachi's move to supplement human managers, a major contributor employee turnover, with artificial intelligences:

It’s a big deal when you consider the ever-complicating world of employee satisfaction, and the ever-diminishing separation between work and home. Bosses can create a lot of problems—after all, they’re only human. Letting an AI run endless calculations to find the best outcome certainly takes the hesitation out, and replaces worker hesitation with facts and numbers...

Basically this system, unlike a charming or insidious android, is just part of the faceless computer system. The manager (still human) gets to decide when to include or not include said AI in his decision-making process.

What’s more, the AI is only working to increase workflow by rearranging processes, not deconstruct them to look for wasted time. “The presumption is that each task is conducted independently,” said a spokesperson. “In this warehouse demonstration, the details of each task were not changed, just the sequence in which they are to be performed.

In this New York Times story, a look at whether Uber and others are at odds with 19th-century-labor laws:

It’s a standard that has many variations as the law tries to separate workers who need protection from independent contractors who can fend for themselves.

But the State of California adheres to the most liberal of definitions. In S.G. Borello & Sons v. the Department of Industrial Relations, a case decided in 1989 by the California Supreme Court, the test for whether a worker is an employee or a contractor is whether the employer retains all “necessary” control over the worker...

But this test has nothing to do with Uber’s relationship with its drivers. As another court said in a similar case involving Lyft, these drivers do not look like employees or contractors. Do they really want to have less flexibility about who they work for? Do they want the inability to work for other people or to preselect their rides? And ultimately, given their ability to quit at any time and go to a competitor or even start their own service, do they need protection? Maybe, but probably not.


When Race and Class Collide

Parents refusing to integrate poor and wealthy students in Brooklyn were a hot topic this week, as reported by the New York Times:

To the city, the solution for the overcrowding at P.S. 8 seemed obvious: move those two neighborhoods from P.S. 8’s zone and into that of P.S. 307, which is nearby and has room to spare. The proposal, however, has drawn intense opposition, and not only from the families who would be rezoned from the predominantly white P.S. 8 to the mostly black P.S. 307. Some residents of the housing project served by P.S. 307 also oppose the rezoning, worried about how an influx of wealthy, mostly white families could change their school...

At a meeting at P.S. 8 on Monday, Dumbo residents pointed to P.S. 307’s low test scores and asked what kind of training and extra resources the school’s teachers would receive to make the education there comparable to that at P.S. 8. Some Dumbo parents said they were anxious about their children’s being part of a racial minority in the school, while others worried that their children would not be sufficiently challenged.

Meanwhile this Washington Post story by Emily Badger discusses what it looks like when a bank avoids minority areas:

According to federal prosecutors, Hudson City Savings Bank opened few branches in black and Hispanic neighborhoods around the New York and Philadelphia regions where it does much of its mortgage business. It placed few of its loan officers in these communities. It worked with hardly any mortgage brokers there, either. And its marketing was mostly elsewhere, too.

On Wednesday, the Department of Justice and the Consumer Financial Protection Bureau jointly ordered the bank to pay about $33 million to make amends for these patterns, in one of the largest "redlining" settlements the government has ever reached.

The case, though, is notable not just for the size of the bank — Hudson City has assets of more than $35 billion — or its location, centered around the largest housing market in America. Hudson City, unlike several other banks recently accused of discrimination, wasn't charged with denying loans to qualified minorities, or jacking up their interest rates. In a subtle but more insidious claim, the government says it was "structuring its business so as to avoid majority-Black-and-Hispanic neighborhoods."

Over at the Atlantic, is a piece by Ta-Nehisi Coates looking at the cost of mass incarceration and its racialized beginnings: 

 

The United States now accounts for less than 5 percent of the world’s inhabitants—and about 25 percent of its incarcerated inhabitants. In 2000, one in 10 black males between the ages of 20 and 40 was incarcerated—10 times the rate of their white peers. In 2010, a third of all black male high-school dropouts between the ages of 20 and 39 were imprisoned, compared with only 13 percent of their white peers...

Our carceral state banishes American citizens to a gray wasteland far beyond the promises and protections the government grants its other citizens. Banishment continues long after one’s actual time behind bars has ended, making housing and employment hard to secure. And banishment was not simply a well-intended response to rising crime. It was the method by which we chose to address the problems that preoccupied Moynihan, problems resulting from “three centuries of sometimes unimaginable mistreatment.” At a cost of $80 billion a year, American correctional facilities are a social-service program—providing health care, meals, and shelter for a whole class of people.

In a companion post, the Atlantic's Alana Semeuls looks at the dire results this has on poor families:

America spends $80 billion a year incarcerating 2.4 million people. That money is spent on things like beds, staff, food, and facilities—but the effects of that incarceration are costly in other ways too, according to a new report out Tuesday from the Ella Baker Center for Human Rights...

When a someone goes to prison, nearly 65 percent of families are suddenly unable to pay for basic needs such as food and housing, the report found. About 70 percent of those families are caring for children under the age of 18. Women like Smith are often responsible for court-related costs associated with the conviction, and many families go into debt to pay those fees, leaving even less for food and shelter. When that family member gets out of jail, their loved ones are left with the task of supporting their reentry. This burden is ongoing since people with a criminal record often are unable to find work upon their release.

“Poverty, in particular, perpetuates the cycle of incarceration, while incarceration itself leads to greater poverty,” the report says.


Rich Man, Poor Man

In the Wall Street Journal, Charles Moore argues that if you want to stave off Marxism, capitalists need to do better at shoring up the middle class:

Since the financial crisis of 2007-08, which Western leader could boast of spreading ownership in any important way? In the U.S. and Britain, the percentage of citizens owning stocks or houses is well down from the late 1980s. In Britain, the average age for buying a first home is now 31 (and many more people than before depend on “the bank of Mom and Dad” to help them do so). In the mid-’80s, it was 27. My own children, who started work in London in the last two years, earn a little less, in real terms, than I did when I began in 1979, yet house prices are 15 times higher. We have become a society of “have lesses,” if not yet of “have nots.”...

When things go backward in nations accustomed to middle-class stability, people start to ask questions. What is the use of capitalism if its rewards go to the few and its risks are dumped on the many? The rights of property do not seem so enticing if the value of what you own collapses or if that property is trapped by debt. What is so great about globalization if it means that the products and services you offer are undercut by foreign competition and that millions of new people can come to your country, take your jobs and enjoy your welfare benefits?

So instead of feeling that it is a privilege to be an ordinary citizen of a free country, many of us start to feel a bit like suckers.

And more arguments on the social safety net and whether we should be using direct cash transfers more liberally to improve poverty outcomes, this time from Charles Kenny in the Atlantic:

[T]he good news is that growing evidence around the world suggests there’s a simple design for a safety-net system that may not create dependency—and may help lift people up and out of poverty: Give poor people cash without conditions attached, and it turns out they use it to buy goods and services that improve their lives and increase their future earnings potential.

It’s a system that policymakers in many countries are loathe to try. They worry, in part, that recipients will waste the money—spending it on, say, flat-screen televisions, cigarettes, and alcohol rather than nutritious food or school supplies. For example, the United States has a very (very) small cash-transfer program called Temporary Assistance for Needy Families, which provides a maximum of $497 per month to a family of four. Even though this cash assistance amounts to only about 8 percent of average household income in the United States, lawmakers frequently feel it necessary to limit how beneficiaries spend the money. Take the Kansas legislature, which in April passed a law specifying that the assistance could not be used to get a tattoo, go to a movie, get your nails done, buy lingerie, or purchase cruise tickets...

When governments give people in-kind support like food, it frequently costs more to deliver that support than it would to distribute cash—and for the same or even a lesser impact. Jesse Cunha of the Naval Postgraduate School conducted a randomized trial of cash versus in-kind transfers in rural Mexico. In addition to finding that cash recipients didn’t spend more on tobacco or alcohol, Cunha learned that those who received cash experienced the same improvements in nutrition and child-health measures as those who received food. But the food program cost at least 20 percent more to administer, and the cash program led to significantly higher non-food consumption by recipients. In other words: At less cost to the government, cash programs led to the same health outcomes as food-based programs, but also provided additional resources for recipients to spend on schooling, medicine, and transport.

Even in basic investing, inequality is apparently rearing its head, argues a new paper featured in Bloomberg View:

 

Finance researchers Marcin Kacperczyk, Jaromir Nosal, and Luminita Stevens realize that differing levels of sophistication are a fundamental, inevitable feature of financial markets. In a new paper, they investigate the effect that this will have on the distribution of income inequality. They find, perhaps unsurprisingly, that more sophisticated investors tend to get more capital income in the form of capital gains when their portfolios rise in value, dividends, interest payments and the like. Basically, if you’re a better investor, your money will make more money. The effect is made worse because sophisticated investors are able to snap up valuable assets quickly, pricing the unsophisticated out of the market, or leaving them to pick up the scraps...

But Kacperczyk et al. have an even more worrying message. They show that it isn't just differences in investor sophistication that drive inequality. As society’s average level of sophistication goes up, information-driven inequality may increase. This will happen if informational advantages build on each other -- the more you know, the better you understand how to learn more. If that’s the case, then educating the general populace about finance might actually exacerbate inequality, instead of correcting it. 

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