Must Reads: In the New York Times, Thomas Edsall looks at a new book on capitalism and its relationship to democracy by Thomas Piketty, which raises a number of "questions about how the global economic system will deal with such phenomena as robotics, the hollowing out of the job market, outsourcing and global competition." This report by Bridges Ventures "unpacks the general 'sense of risk' associated with impact investing into five distinct risk factors that are most deterring asset owners." This new McKinsey report looks at "next shoring," where "proximity to demand and innovative supply ecosystems will trump labor costs as technology transforms operations in the years ahead."
[W]hat I believe unites the people of this nation, regardless of race or region or party, young or old, rich or poor, is the simple, profound belief in opportunity for all – the notion that if you work hard and take responsibility, you can get ahead. Let’s face it: that belief has suffered some serious blows. Over more than three decades, even before the Great Recession hit, massive shifts in technology and global competition had eliminated a lot of good, middle-class jobs, and weakened the economic foundations that families depend on. Today, after four years of economic growth, corporate profits and stock prices have rarely been higher, and those at the top have never done better. But average wages have barely budged. Inequality has deepened. Upward mobility has stalled. The cold, hard fact is that even in the midst of recovery, too many Americans are working more than ever just to get by – let alone get ahead. And too many still aren’t working at all.
Here are some thoughts from cartoonist Stuart Carlson on the state of things:
Obama used the words equal, equality, and inequality just eight times. He used opportunity and opportunities 14 times. He used work, workers, working, workforce, and hard-working more than 60 times. Thirty-six of those references were directly about economic labor. The distinction is important. Most people think income inequality is fine—in fact, it’s proper—when one person works harder than another. Obama’s argument isn’t just that the economy has left incomes unequal. It’s that the economy is failing to honor work.
Mohamed El-Erian, CEO of PIMCO offered these thoughts on inequality:
On the one hand, disappointing growth and persistent unemployment worsens the "inequality trio" of income, wealth, and opportunities. On the other hand, the greater the inequality trio, the more it undermines consumption, discourages investments, and exacerbate harmful debt overhangs – all of which curtail growth and job creation. The core of today's serious debate about inequality no longer stumbles on these factors. Indeed, most people -- and especially those who have looked at the data and done proper analysis -- agree that inequality in the U.S. is unusually pervasive and harmful. It is also on course to get worse absent sustained corrective efforts. Nor is there much disagreement that a continuation of these trends would eat away at the fabric of society and undermine what makes this country special. And most agree that even the very rich cannot totally insulate themselves from this social and economic phenomenon.
Over at Foreign Policy, Richard Altman argues inequality is economically inefficient and expensive.
A number of commentators made a business case for reducing inequality. In the speech, the President said, "Profitable corporations like Costco see higher wages as the smart way to boost productivity and reduce turnover," and MIT's Zeynep Ton explains how Costco and others have won in competitive markets using the complex but workable good jobs strategy: "The smart way to deal with an increase in the minimum wage is to design work in a way that improves employees’ productivity and increases their contribution to profits." In Fortune Magazine, business commentator Sanjay Sanghoee similarly argues that inequality and wage stagnation generally is a problem for business:
Inequality affects workers in two ways: The first is in the purchasing power of the dollars in their paycheck. The "real" value of these dollars declines as prices rise, and even though inflation has been reasonably tame for the past few years at about 2%, wages have grown at about the same rate (or less) while real-world experience shows us that the prices of everything from wireless plans and health insurance to consumables, such as milk, keep edging upwards constantly. This means that the average American is growing poorer every day, even though there may be a modest uptick in wages. The second effect of inequality is the demoralization of the workforce due to diminishing financial returns. When executive wages are steep and continue to climb while non-executive pay lags far behind (the average CEO of an S&P 500 company makes 204 times the income of a typical worker, and this ratio has increased by 20% since 2009), every ounce of extra effort by an average worker yields a proportionally smaller degree of reward -- which, in turn, fosters resentment and can hurt productivity.
Christopher Meyer and Julia Kirby at the Harvard Business Review blog say "it’s time to recognize that income inequality is a sustainability issue" important for companies' bottom lines:
The evaporation of the middle class, like the disappearance of fish stocks or forests, will be the end of many companies. Henry Ford understood this, paying the workers at Ford more than their counterparts at other industrial companies, reasoning that helping to expand the new middle class was a way to expand the market for Ford’s product.
(This will be a throwback for readers who have been with us for a while: back in August we shared an article that explores Ford's policies in more depth, and both Ford and Costco played big roles in the McWage Wars.) Diana Furchtgott-Roth of Economics21 at the Manhattan Institute for Policy Research argues that President Obama's executive order raising the minimum wage to $10.10 for contractors work on federal government projects will rebound badly to the workers, "since Congress is unlikely to increase contractors' funding because Obama has raised the minimum wage by executive order, skirting congressional authority." In the NYT's Sunday Review, Steven Rattner debunks accounts of the return of U.S. manufacturing jobs with the aid of several charts:
[W]e need to get real about the so-called renaissance, which has in reality been a trickle of jobs, often dependent on huge public subsidies. Most important, in order to compete with China and other low-wage countries, these new jobs offer less in health care, pension and benefits than industrial workers historically received.
In an article in The Atlantic in 2012 about General Electric’s decision to open its first new assembly line in 55 years in Louisville, Ky., it was not until deep in the story that readers learned that the jobs were starting at just over $13.50 an hour. That’s less than $30,000 a year, hardly the middle-class life usually ascribed to manufacturing employment.
Over at Bloomberg, Clive Crooks takes another look at the technology versus jobs debate and says "the biggest danger is a floundering system of government that will fail both to help the victims of economic disruption and to reap the fullest benefits."
This week, Heron's President Clara Miller won the Prince's Prize for Innovative Philanthropy (PDF). Here is what Prince Albert of Monaco had to say about innovation in philanthropy in the Huffington Post:
We are also seeing new conceptual approaches to philanthropy, including venture philanthropy, which supports aid projects with business-planning expertise for maximum scale and sustainability. New financial systems deploy entire endowments to promote social change, rather than just the 5% of assets that foundations normally disburse as grants. "Donor-advised funds" set up investment portfolios for individuals that easily direct regular donations to philanthropic works. New networking technologies, related to social media, make for much more fluent and useful conversations, whether between philanthropists and the projects they support, among philanthropists who share common interests in giving, or among volunteers looking to contribute their money and time.
Four foundation heads in the Chronicle of Philanthropy discuss their decision to help bailout Detroit using financial tools beyond their existing grant making in the region:
At its best, we hope our involvement may bolster the spirit of positive engagement and creativity in Detroit, catalyzing others to invest strategically across the region. It does not mark the start of philanthropy as a solution to public insolvency. This is a unique, clear-eyed move to push forward positive negotiations, with our philanthropic dollars being exclusively pegged for two roles: safeguarding the DIA and protecting pensions. We know that some will ask what this means for foundations around the country and whether we advocate aggressive intervention and high-dollar “emergency” grant making to fill gaps in our communities. So let us be clear: We do not think philanthropy can be a replacement for social capital or that any foundation has the resources or wisdom to successfully play the role of civic savior.
Meanwhile in Forbes commentator Jeffrey Dorfman discusses why conservatives believe private charities are a better bet than government for aiding the poor:
People reasonably compare the good works that they see being done by charities to the lack of results that they see from government programs and wonder why the government programs keep getting expanded. Wanting to see the most good done with the money dedicated to helping the poor is not mean-spirited; it is smart, rational, and what everybody should want. So opposing government aid programs does not mean you hate the poor; it might well mean you hate seeing their supposed aid funds wasted.
In this issue, we have new thinking on the minimum wage, inequality, the trajectory of philanthropy, and the Dalai Lama talks free enterprise.
Must Reads: Check out these videos with transcripts of panels from the American Enterprise Institute featuring the Dalai Lama on "happiness, free enterprise and human flourishing." You might also be interested in AEI's Arthur Brooks piece in Commentary Magazine arguing "the conservative creed should be fighting for people, especially vulnerable people, whether or not they vote as we do." The Hitachi Foundation released its strategic plan on "creating value at the intersection between people and profit." John Halpin and Karl Agne have a new Center for American Progress report on Millennials and poverty. In Bloomberg, Peter Orszag discusses the woes of the healthcare labor market.
Last month, President Obama in his State of Union address announced his plans to raise the minimum wage to more than $10 an hour stoking the growing debates over whether mandated increases hurt employment and help poor people. Check out these cartoons from Nick Anderson and Clay Bennett:
Adding to the debate is a new Congressional Budget Office report finding that increasing the minimum wage to $10.10 an hour for all workers would help more than 16 million but could kill some half a million jobs, check out this chart:
In Forbes, Louis Woodhill argues the disappearance of jobs forecast in the CBO report are more worrisome than they might first appear:
By definition, the 16.5 million workers that would see their incomes rise as a result of hiking the minimum wage to $10.10/hour are already worth the higher wages that they would be paid. Otherwise, they would be laid off. No employer will pay anyone more than they are worth... In sharp contrast, the 0.5 million people that would lose their jobs (or not be hired in the first place) because of a $10.10/hour minimum wage would be knocked off the first rung of the ladder of opportunity. Many of them would fall into the black hole of permanent joblessness. After all, being older, and having been unemployed longer, does not increase one’s attractiveness to employers.
John Schmidt over at the Center for Economic Policy Research discusses CBO findings and whether workers would be better off:
[A]n important feature of low-wage jobs is that they tend to have high turnover. Even if half the workers in a low-wage workplace are in stable long-term jobs, the other half of positions might turnover completely once or even twice in a year. High turnover is an important context to keep in mind when evaluating the costs and benefits of the minimum wage. Even if the CBO’s central estimate of job loss is correct, very few low-wage workers will receive pink slips. Given high turnover, employers who want to reduce employment are much more likely to make any adjustments implied by the CBO estimates through attrition –failing to replace a few percent of the workers who leave on a regular basis. Workers looking for jobs at the new, higher minimum wage may be looking in a slightly smaller job pool, for a slightly longer period of time. But, when they find a job, it will pay substantially more than the job they would have found somewhat more quickly at the old, but lower minimum wage.
Over at the NYT's Economix blog, Jared Bernstein argues that job quality should be just as important as job quantity, "especially in the low-wage sector, where the decline in the real value of the minimum wage, the increase in earnings inequality (meaning less growth finds its way to the low end of the wage scale), and the low bargaining power of the work force have placed strong, negative pressure on wage trends for decades." Check out this chart from CNNMoney breaking down the demographics for minimum wage workers:
There also is a third, less prominent argument on the minimum wage put forth by Demos and others on subsidizing private employers costs via social safety nets needed by workers. Here is the Washington Post's E.J. Dionne's take on this issue:
Ron Unz, a Silicon Valley millionaire and one-time Republican candidate for governor of California, is championing an initiative to raise his state’s minimum wage to $12 an hour.Unz has argued that a minimum wage hike “would function as a massive stimulus package.” ...He also pointed to the fact that government — through wage subsidies in the tax code, Medicaid and food stamps — is now conferring substantial benefits on employers of low-wage labor. “One of the strange things in our society right now is that we have all these low-wage workers who are getting $7.50, $8 or $9 an hour,” Unz said, “and because they earn such small wages, the government subsidizes them with billions or tens of billions of dollars of social welfare spending that comes from the taxpayer. It’s a classic example of businesses’ privatizing the benefits of their workers while socializing the costs.”
You might also be interested in this letter from more than 600 economists supporting a minimum wage hike, in the form of "a three-step raise of 95 cents a year for three years—which would mean a minimum wage of $10.10 by 2016." The New York Times also has a new interactive that allows you to explore assess general household expenses and whether you could get by on current state minimum wages.
We have more thoughts on inequality this week. First up is Rex Nutting over at the WSJ's MarketWatch discussing his take on the great wealth divide:
I'm not saying corporate executives, lawyers, and financiers don’t deserve to be well compensated. Running complex organizations and providing expert advice is extremely difficult to do well, and those who do it well earn their pay. But while some CEOs add real value to their company, many others are mediocre at best. And mediocre ones often make just as much as the talented ones.
The market that determines CEO pay is fixed, like a kangaroo court. CEOs aren’t paid according to the value they bring to their company; their pay is set using a method that’s guaranteed to inflate CEO salaries without any relation to value added. And once CEO salaries are inflated, so are all the other salaries and compensation packages for top executives.
Brookings' Richard Reeves offers these thoughts on inequality today, which he says is trinary rather than binary problem:
At the top, we can see an elite doing well in a labor market offering big returns to human capital. This is perhaps not the just the top 1% (much though politics might be easier if that were so) but, say, the top decile, or 10%, of the income distribution... Below this affluent class is a broad swath sometimes dubbed the ‘squeezed middle.' This group have decent labor market participation rates, but wages that are rising slowly. In many cases, two wages are needed to support the family. They own a home, but are not otherwise wealthy. Savings exist for emergencies or one-off expenditures, but run out fast if the households has a serious downward shock to income... At the bottom of the social scale are those whose poverty is entrenched. Labor market attachment is weak, with many people in long-term unemployment. Teen pregnancy is still heard of, unlike in most communities today. Poverty is felt in most domains of life - crime, health, education, parenting, drug addiction and housing. The growing economic segregation of neighborhoods further isolates this group from chances of work, better schooling or valuable social networks.
Meanwhile, the Manhattan Institute's James Piereson in the Wall Street Journal argues that at "a time of slow economic growth, mounting government debt, a stalemated politics and the impending retirement of the 'baby boomers,' the attacks on the 'one percent' look more and more like a diversion from the nation's real problems." U.C. Davis' Gregory Clark in the New York Times discusses social mobility and how our ancestors social status often is an indicator of our lot in life. AP's John Boak reports that the wealth gap seems to be most extreme in some of America's largest cities. Similarly Brookings' Alan Berube discusses inequality in big cities, check out this chart:
You also might be interested in this piece from AEI's Richard Vedder over at Bloomberg asking why folks who are supposed to care about inequality give institution's like Harvard a pass on favorable tax treatment. And check out this New York Times "Room for Debate" about the rise of the "aflluenza defense" and what it says about inequality.
In the New Yorker, Russ Juskalian discusses Andrew Carnegie and today's philanthropy:
Our own time has increasingly been called a New Gilded Age. A few weeks ago, after Oxfam International published a report showing that the richest eighty-five people in the world have the same combined wealth as the poorest half of the population, Slate’s Will Oremus wrote: “Global capitalism, we have a problem.” ...At the center of this debate is how to quantify the positive impact of philanthropy by the world’s wealthiest people on the world’s poorest, along with the negative impact of inequality—both tasks that are difficult, and perhaps impossible. Giving by the ultra-rich is significant but makes up only a small proportion of total giving. A recent report puts total annual giving by individuals in the U.S. at around two hundred and thirty billion dollars—about thirty times the amount given last year by the people on the Philanthropy 50 list. The Philanthropy 50 list suggests that rich donors spend less on causes having to do directly with poverty alleviation than on other areas. The categories that got the greatest amounts of funding from the fifty highest givers were foundations, colleges and universities, and hospitals and medical centers.
Meanwhile in Forbes, wealth adviser Phil DeMuth discusses "big charity" and younger givers:
Americans love to be charitable, and the tax-deduction for charitable contributions is nearly as old as the tax code itself. The ultra-high-net-worth, when faced with enormous tax bills, would rather give their money to charity than to big government. For charities, this has created an interesting arbitrage: as long as they could be only slightly less wasteful than the government, plus could plate up some ancillary perks in the form of social recognition and a “feel-good” giving experience (where the IRS notably falls down, in my opinion), they held the trump card. But once you go beyond the photograph of the baby seal and the donor cocktail party fabulous, you find agency problems galore. That is to say, these institutions are principally interested in their own aggrandizement. The mission statement over the door is just a magic carpet to that end. Invariably, their charity begins at home. My pal Ben Stein described in The New York Times how Yale University today is basically a hedge fund with a small college attached. Consider that the worst thing for the American Cancer Association would be if someone actually found a cure for cancer... The young ultra-affluent have figured all this out. They are bypassing their parent’s antebellum eleemosynary institutions. Which means these Tutankhamen-sized charities are headed for the mothballs right along with the mink stoles.
And, over at Pollen Jame Toscano discusses where philanthropy is headed:
The idea of philanthropic assistance in creating wealth is not new. Just look at the worldwide phenomenon of microloans, which have indeed promoted independence, employment, and wealth.
The difference now is that wealth creation is becoming the significant driver among those new philanthropists who value increasing social mobility, using their resources to achieve this important aspect of the American Dream.
The new philanthropists envision funding going beyond grants and loans to a new focus on investments in nonprofits, for-profits and any combination for solutions, for cures. They use rigorous metrics, leverage of all types, and intensive due diligence to find their philanthropic investment targets.
In the Pioneer Post, Sophie Hudson offers up seven things you need to know "about de-risking impact investing."
Over at the Economix blog, Jared Bernstein argues before we can assess "the state of technological unemployment, we have to get rid of bad policy-induced unemployment." In the Fiscal Times, Bruce Bartlett discusses the Fed and the challenges of economic forecasting. In the New York Times, Paul Krugman contends that perceptions of stimulus failure put the country on the austerity road and "job creation almost disappeared from inside-the-Beltway discourse." In the Boston Review, Claude Fischer looks at attitudes toward risk sharing and reducing economic uncertainties.