Let's start with a cartoon:
We could have doubled down on making the middle class so capable that it could compete with anyone, but I think instead, what we did collectively is we made a series of unsustainable promises to maintain the illusion of prosperity. Promises like: let's extend credit to the middle class so that people can consume—especially houses; promises like the government will increasingly cover your healthcare costs in retirement, promises like the government will directly employ you. You then take those promises, couple them with a nasty recession and two wars and you wind up with a government that is physically hobbled and politically divided. So from government and from business you've got a systematic underinvestment in those shared resources that we need for the middle class to thrive... It is a tricky moment. I really see us at a crossroads with two pathways. The current path is one where federal policy makers squabble for partisan gains, delay tough choices, and make America a less attractive place to compete. Business leaders pursue their narrow short-term interest and free ride off each other's investments—the business environment deteriorates, businesses leave America, the government enacts anti-business policies, companies reduce their U.S. activities further, and distrust deepens.
There is however another, far-better path possible. Federal policy makers put their long-term fiscal house in order, invest in infrastructure, enact policies that make America a great place to do business. Business leaders recognizing their long-run interest is in a vibrant commons take steps to build a skilled workforce, to upgrade local suppliers, to foster innovation, to reinforce education. The productivity gains enable firms in the U.S. to win in the global market place while also creating jobs that lift living standards.
Over at CFR's Renewing America blog, Michael Spence looks at why public investment is so important and the role monetary policy plays:
Properly targeted public investment can do much to boost economic performance, generating aggregate demand quickly, fueling productivity growth by improving human capital, encouraging technological innovation, and spurring private-sector investment by increasing returns. Though public investment cannot fix a large demand shortfall overnight, it can accelerate the recovery and establish more sustainable growth patterns. The problem is that unconventional monetary policies in some major economies have created a low-yield environment, leaving investors somewhat desperate for high-yield options. Many pension funds are underwater, because the returns required to meet their longer-term liabilities seem unattainable. Meanwhile, capital is accumulating on high-net-worth balance sheets and in sovereign-wealth funds...Faced with tight fiscal (and political) constraints, policymakers should abandon the flawed notion that investments with broad – and, to some extent, non-appropriable – public benefits must be financed entirely with public funds. Instead, they should establish intermediation channels for long-term financing.
You also may be interested in this Al Jazeera story by David Cay Johnston about how U.S. companies are becoming geriatric, which he says isn't good for economic growth, jobs or wages:
A “startup deficit” began in the 1980s, the very era when President Ronald Reagan said he wanted to unshackle business from regulations and taxes to foster economic growth. In the early 1980s about 13 percent of businesses were less than a year old. Today only about 8 percent are. The corollary result, according to Pugsley and Şahin: “In the early 1980s, only around one-third of firms were 11 or more years old (what we call mature firms), while by 2012 almost half of all firms were 11 or more years old.” ..Workers who have a stable job with a firm that seems likely to endure are likely willing to tolerate less pay rather than take a gig for better pay at a new firm that may fail. A second study published last month examined wage inequality in the context of company size. Firms of all sizes pay about the same for jobs requiring no skills or only a modicum of skill, the data showed. But as firms get bigger, they pay more for highly skilled workers, according to Holger M. Mueller of New York University, Elena Simintzi of the University of British Columbia and Paige P. Ouimet of the University of North Carolina at Chapel Hill. As firms grow larger, this trend implies increased wage inequality, especially if there are relatively fewer — and therefore smaller — young firms.
Speaking of investment, this Guardian piece by Nesrine Malik from late last year looks at whether governments have any sway over multinational entities that seem to be avoiding taxes. You also might be interested to read about new rules for Wall Street banks that are forcing them to spend more of their capital whenever they make a bet; the riskier the bet, the more capital they are required to spend, reports the New York Times' Nathanial Popper and Peter Eavis:
Banks can increase their pool of capital by raising more money from investors or holding onto profits, but doing so generally costs money and reduces profits accruing to shareholders, which typically include employees of the bank. The capital rules have had the effect of encouraging banks to focus on parts of their operations in which they are potentially taking fewer risks — like the divisions that manage money for pensions and investors — and de-emphasizing the trading desks.
New rules are leading some banks such as JP Morgan to charge large clients fees on accounts "prone to fleeing" in times of crisis report the Wall Street Journal's Emily Glazer. You also might be interested in this NYT Dealbook story about former Google exec who along with his wife, moved to Kansas and bought the Citizens Bank of Weir, which they hope will help "reshape a highly regulated and innovation-resistant industry."
Be sure to read this post from Heron's Amy Orr on why many of us are invested in and profiting from the private prison industry, whether we like it or not. Check out this chart:
In CSRwire, Don Schaffer looks at the 100 percent impact investment movement.
Some people where so inspired by this Detroit FreePress story of man who walked 21 miles a day to get to his job in the Detroit metro area that they donated as much as $350,000 and a new car. Sadly, it also came with fears for his safety and requirements that he move temporarily.
Meanwhile, the donor advised fund debate is continuing with another set of stories looking at the rules under which they operate and who is controlling them. Over at U.S. News and World Report, Lou Calozo looks at whether they are a cost efficient way to give:
Outside experts agree that donor-advised funds offer key advantages over and above the tax breaks. “[Donor-advised funds] provide a much cheaper alternative to any companies or wealthy individuals running their own small foundations,” says Thomas Hall, associate professor of finance and economics at Christopher Newport University in Newport News, Virginia. He notes foundations often have high administrative costs and soak up time and energy from CEOs, board members and donors. “By collapsing them and reinvesting the proceeds into a [donor-advised fund], more money goes to the charitable cause as opposed to the administrative costs.”
In Wealth Management, Diana Britton looks at whether tax reform may be on the horizon for these funds:
Assets in these funds have grown from $30.81 billion in 2008 to $53.74 billion in 2013, due to the growth in the number of funds and contributions (up 86 percent from 2008), as well as the overall rise in the stock market, according to the National Philanthropic Trust, an independent provider of DAFs. There are now more than 217,000 DAFs, a 34 percent increase over the last seven years. Compare that to 84,350 private foundations. But success can also bring scrutiny. Congress is looking closely at the funds, while some critics believe they have unfair advantages that deprive the government of tax revenue while enriching the fund companies that hold the money...In late February 2014, Representative Dave Camp (R-Mich.) proposed tax reform legislation including a requirement that all donations to a DAF be paid out within five years of their contribution, or 20 percent a year. There are also efforts to cap all deductions.
There is also this story about the work of the nonprofit Endeavor, alongside foundations such as Knight, to work with growth companies in Detroit:
"Nobody is filling this gap in the market," Egner said. "We're doing startup work and corporate support very well in the state, but nobody is focused on high-growth potential, those $10 million to $15 million gross revenue companies that can blow it out to $200 million. If we get this right, the job growth will come on quickly." And, in fact, Endeavor's research shows that the average high-growth company employs eight times as many people as the average non-high-growth firm and 35 times as many as the average startup.
The Inequality Mix
Over at the MatadorNetwork, Amanda Machado paints a stark picture of the inequality in San Francisco:
San Francisco’s Human Services Agency used the Gini Coefficient, a popular formula employed by the World Bank, the CIA, and other groups, to measure how San Francisco’s income inequality compared to other cities and countries. The formula gives a region a score of 0 if every person in its population shares wealth exactly equally. The scores increase towards 1 the more the wealth is held by a smaller portion of people. Using this formula, San Francisco scored a .523, ranking it slightly more unequal than Rwanda (.508) and only slightly more equal than Guatemala (.559). To add more perspective, countries like Sweden and Denmark scored around a .25, cities like Amsterdam, London and Paris all scored around a .32., and the United States as a whole scored a .45.
And it isn't just San Francisco. Manuel Pastor and Dan Braun in Pacific Magazine say California is the country's most unequal state:
California, for example, is the home to more super rich than anywhere else in the country—and it also exhibits the highest poverty rate in the nation, when cost of living is taken into account. Income disparities in the state of California are among the highest in the nation, outpacing such places as Georgia and Mississippi in terms of the Gini coefficient, a standard measure of inequality...
The widening gap has many causes. As California, through Silicon Valley, led the world into the digital age, productivity rose to unprecedented levels. But virtually all of the economic benefits went to those at the top, partly because of the spectacular wealth created by the tech sector. In just the last 10 years, California tech companies added at least 23 billionaires to the list of richest Americans—Twitter alone boasted of creating 1,600 millionaires overnight when it went public 15 months ago. The state now has 111 billionaires; if we were a separate country, that would put us behind only the U.S. and China, and tie us with Russia.
You may also be interested in this Atlantic story from last October showing that one fifth of Detroit's families may be in jeopardy of losing their homes because they were behind on their taxes, but they still have options--if someone would inform them:
Perhaps because so many believe that poor people are ill-equipped to be homeowners, very few people losing their homes to foreclosure have been informed that they can re-buy their homes. A given house’s unpaid property taxes can amount to thousands of dollars, yet many homeowners aren’t aware that they could erase their debts and regain ownership by bidding on their own homes for prices as low as $500.
The Nation's Michelle Chen looks at whether welfare reform is leading to early deaths:
Researchers found that cutting off support leaves lasting scars on the most vulnerable segment of the TANF population—the neediest families: “TANF enrollees with pre-school aged children or larger families are both more likely to be food insecure and, at least among those required to enter the workforce quickly, in poorer mental health.” The projections show that despite “very large direct monetary savings…for both individuals and for the US government, TANF may also harm women who could not subsequently work (whether due to young children at home, large family sizes, mental illness, and/or physical illness). Some may have ended up relying on weak financial networks or become homeless.”
...While lawmakers may tout the taxpayer savings under welfare reform, if asked to consider whether forcing a mother of four with chronic asthma to live in a car was worth all the belt-tightening, would they still say reform paid off? It was surely a heavy price for the kids to pay.