In Case You Missed It: A Better or Worse Middle Class?

In Case You Missed It

In this issue, debating the situation of the middle-class, the role of business leaders on income inequality, and Wall Street’s support of social impact bonds.

How Much Do You Really Need?

Lets start with a cartoon:


Peter Georegescu was featured in The New York Times, recounting his own history as an immigrant coming to America the people who helped him achieve the American dream. He is calling on CEOs and all who have benefited from capitalism to take action against growing income inequality, before it’s too late:

Business has the most to gain from a healthy America, and the most to lose by social unrest or punitive taxation. Business can start the process in two steps. First, invest in the actual value creators — the employees. Start compensating fairly, by which I mean a wage that enables employees to share amply in productivity increases and creative innovations.

Second, businesses must invest aggressively in their own operations, directing profit into productivity and innovation to boost real business performance. Today, too many corporations reduce investment in research and development and brand building. As a result, we see a general decline in the value of their brands and other assets. To make up for those declines and for anemic revenues, businesses buy back their stock (now at record levels) and thus artificially boost earnings per share.

Someone must break the ice; someone must lead. Companies including Home Depot, Costco Wholesale, Whole Foods, Publix, Qualcomm, Starbucks and Gravity Payments are taking small steps, and compensating employees more. These are the green shoots we need. Similar changes must be made by many more businesses.

Just four months after Dan Price announced he would take a pay cut raise the minimum wages of his employees to $70,000 per year, things have gone south for his company, reports the New York Times:

What few outsiders realized, however, was how much turmoil all the hoopla was causing at the company itself. To begin with, Gravity was simply unprepared for the onslaught of emails, Facebook posts and phone calls. The attention was thrilling, but it was also exhausting and distracting. And with so many eyes focused on the firm, some hoping to witness failure, the pressure has been intense.

Two of Mr. Price’s most valued employees quit, spurred in part by their view that it was unfair to double the pay of some new hires while the longest-serving staff members got small or no raises. Some friends and associates in Seattle’s close-knit entrepreneurial network were also piqued that Mr. Price’s action made them look stingy in front of their own employees.

Joel Kotkin of The Daily Beast discusses the thinking of Jane Jacobs in the 60s on urban revival, arguing she may have fundamentally misunderstood the underlying economic patterns of urban growth:

[W]hen cities did begin to come back—a handful in the ’80s and then again more around the time of the millennium—the revivals were in many ways the opposite of [Jacobs’] grassroots vision. Instead of creating more family-oriented middle-class neighborhoods, the urban revival ended up being based on “luring” the affluent, the still forming young person, or the accomplished, childless professional than generating a new middle class...

Jacobs’s vision failed in large part because today’s cities play a different economic role than they did in the past. The economic basis of her New York—small businesses, manufacturers, business service firms employing masses of middle-class workers—has declined while the city has evolved into what Jean Gottman called the “transactional metropolis,” dependent on the most elite financial services, high-end consumption, and the all too present media industry.

This urban economy has many strengths but increasingly relies on the rich. A Citigroup study suggested that cities, particularly New York and London, have become “plutonomies”—economies driven largely by the wealthy class’s investment and spending. In this way the playground or luxury cores serve less as places of aspiration than geographies of inequality.


 

A Better or Worse Middle Class?

The U.S. Census Bureau data suggests that middle-class incomes have grown by just 0.23 percent per year since 1985. However, economist  Martin Feldman argues that after accounting for aging, shrinking household size, and tax cuts and transfers from the federal government, even while the income of the top one percent has the highest level of growth, middle-class income has grown significantly since the late 1970s:

The official Census estimate suffers from three important problems. For starters, it fails to recognize the changing composition of the population; the household of today is quite different from the household of 30 years ago.

Moreover, the Census Bureau’s estimate of income is too narrow, given that middle-income families have received increasing government transfers while benefiting from lower income-tax rates. Finally, the price index used by the Census Bureau fails to capture the important contributions of new products and product improvements to Americans’ standard of living.

Over at The Week, James Pethokoukis writes that debates over middle-class income growth ignore the fact that apart from changes in income, middle class living standards have improved exponentially.

Meanwhile, the Center for American Progress' Brendan Duke and Andrew Schwartz argue that the picture this data paints is in many ways even more disturbing than that of the Census Bureau:

Middle-class families with children experienced a 14 percentage point increase in comprehensive income between 2000 and 2011—the last year for which the CBO provides data—but 8 percentage points of that increase came from federal government transfers and 6 percentage points came from tax reductions. Market income actually fell over that period

 

Many economists argue that there will be additional downfalls for fast-food workers following wage increases, including tremendous amounts of job loss. James Sherk of The National Review had this to say:

In the longer term, fast-food restaurants would almost certainly react by replacing humans with machines. McDonald’s is already experimenting with replacing cashiers with kiosks. California inventors have developed a robot that cooks 360 hamburgers an hour. Mandating higher wages guarantees restaurants will implement this technology more quickly and automate more jobs than they otherwise would. That will mean lower prices, but fewer entry-level jobs.

Sherk draws these conclusions based on projections made by the Heritage Foundation on how the rise in minimum wage would affect fast-food sales, profits, prices, and ultimately, hours worked by employees.

On the other hand, Fight for 15, the organization advocating for achieving fast-food wage hikes nationwide, points out in a tweet that while corporate CEOs go unquestioned when receiving enormous profits, it becomes controversial when fast-food workers are guaranteed $15 an hour, surely not a wage that provides a middle-class standard of living to single-parent or single-employed households, especially given the rising costs of urban life.


 

Are They Even Listening?

The debate over fossil fuel divestment continues to rage, with the NYTimes hosting a “Room For Debate” series featuring several opinion pieces on the issue. On one side of the debate sit Naomi Oreskes, a professor of history at Harvard and co-author of the book “The Collapse of Western Civilization: A View from the Future”, and Aram Ghoogasian, a student at UCLA, who argues that the fossil fuel industry has a profit-driven mission that runs counter to those of universities. Oreskes explains her argument succinctly:

Some of the leading fossil fuel companies claim that they no longer promote disinformation, but nearly all of them are members of trade organizations that do. Why should universities invest in an industry that has deliberately sought to undermine the knowledge that we have produced?

On the other side sits Robert Stavins, a professor at the Harvard Kennedy School and Rachel Peterson, a research associate for the National Association of Scholars. Stavins characterizes the divestment movement on campus as a misguided “moral crusade” that does not lead to significant shifts in the economy.

Divestment doesn't affect the ability of fossil fuel companies to raise capital: For each institution that divests, there are other investors that take its place. As long as the world still continues to rely on fossil fuels, and consumes them at current rates, the companies that supply them will have a ready market for their products.

Peterson echos a similar sentiment in her opinion piece:

Those who advocate for divestment say shareholder advocacy has failed to change the fossil fuel industry’s behavior, so schools should sell their stocks. The first part of that statement is true: Shell and Exxon are not going to quit drilling because some shareholders tell them to stop. But if the aim is to persuade the industry to convert to renewables, divestment is a worse strategy. Capital markets aren’t punishing fossil fuel companies — they have plenty of investors — and corporations have no incentive to heed ex-investors.

Googasian has countered that, while divestment may not be a financial attack on the fossil fuels industry, it functions on a larger scale as a means of raising public awareness about the issues involved and has the potential to apply to others.

Though divestment may not always exert significant financial pressure, it can, at the very least, exert a good deal of social pressure on corporations and contribute to large-scale change. Communicating disagreement this way is an effective, and public, means of dissent.

And divestment can be a protest for more issues than climate change alone. One of the strategies of the Boycott, Divestment, and Sanctions movement, for example, is to pressure universities to divest from companies doing business in Israeli-occupied Palestine, with the goal of ending the illegal occupation there. The companies range from weapons manufacturers to tech companies, whose products are used for surveillance and to restrict the movement of Palestinians.


 

How Should We Split the Bill?

Social Impact bonds have once again garnered a bit of attention with the early conclusion of the Rikers Island recidivism project. A Reuters article from Jessica Toonkel points to Wall Street’s continued support for the experimental social financing model:

Still, the idea of social impact bonds, also called pay for performance contracts, has appeal for those who continue to participate in and seek deals in that space, officials at the firms told Reuters.

"We are certainly not going to distance ourselves from our explorations into doing social impact bonds because of what happened here," said Gary Hattem, head of Deutsche Bank's global finance group. "This is the frontier of something."

Others, such as Liz Farmer at Governing, are still skeptical about the ability of social impact bonds to reduce costs for the government and achieve their desired social impact:

Media outlets have often touted the innovative financing tool with few notes about the complicated nature of the projects. Last year on Capitol Hill, where bipartisan support is famously elusive these days, a $300 million proposal pushed by President Obama to allocate federal funds for social impact bond projects in the states managed to attract proponents on both sides of the aisle.

But as the enthusiasm for social impact bonds has grown, so has skepticism about the concept of partnering with the private sector to accomplish social goals. Last spring, a congressional hearing on the subject ended on a negative note as critics questioned the complicated structure of program contracts between governments, investors and the various private operators involved. “I don’t get this at all,” said Maine independent Sen. Angus King, squinting with disbelief. “I think this is an admission that government isn’t doing what it’s supposed to do. This strikes me as a fancy way of contracting out.”

Heron's Clara Miller has been vocal about her own doubt regarding impact bonds but has expressed an openness to support one if Heron found an appropriate opportunity to do so.

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