Must Reads: In Shelterforce Magazine, Harvard's David Wood looks at the role of government in impact investing. In the New York Times, University of Southern California's Jacob Soll says if we want "stable, sustainable capitalism, a good place to start would be to make double-entry accounting and basic finance part of the curriculum in high school, as they were in Renaissance Florence and Amsterdam." Meanwhile, also in the NYT, Annie Lowrey reports that while many of the poor in the United States enjoy "a level of material abundance unthinkable just a generation or two ago," they have fallen further behind the middle class and the affluent in both income and consumption. The McKnight Foundation's Kate Wolford discusses the decision to convert an initial $200 million, roughly 10% of current endowment assets, to impact investments, saying she anticipates it will be a little messy and require embracing the “push and pull” of an emergent space.
Let's get things started with this cartoon from Bob Gorrell over at TownHall:
In Shelterforce Magazine, author Michael Shuman argues "investor apartheid" securities rules are keeping investment artificially blocked from the businesses with the most positive impact on communities— small, local ones:
Despite the potential power of local investing to ameliorate poverty and the potential profitability for its practitioners, very little of mainstream investment touches local business. The reason can be traced back the 1930s, when the United States enacted a series of securities laws that should be called Investor Apartheid. If you’re in the top 1 percent of income earners or wealth holders—a so-called “accredited investor”—you can invest in any business any amount you want, no questions asked. If you’re in the other “unaccredited” 99 percent, you can’t invest a penny unless that business has undertaken significant legal disclosures that easily could cost it $25,000, $50,000, even $100,000. The practical result is that smaller businesses, daunted by the probable legal bills, don’t bother with unaccredited investors. The undeniable result has been a huge capital market failure. Even though publicly traded companies support less than half the economy and confer the fewest economic-development benefits, they receive nearly all of our long-term investment. That is, well over 99 percent of the $30 trillion of long-term investment that U.S. households make—in stocks, bonds, mutual funds, pension funds, and insurance funds—is in the nonlocal economy. Americans are systematically overinvesting in Fortune 500 Companies and underinvesting in local business... If we were to fix this capital market failure, at least half of the $30 trillion of long-term investment would shift to the half of the economy that is local. That would mean a $15 trillion shift into communities’ economies. This is the mother lode of capital for transforming the American economy.
The American Enterprise Institute's John Makin says this recovery has produced limp economic investment:
One of the most important characteristics of a robust recovery is robust investment growth. After a typical recession, with inventories depleted and demand rising, most producers wish to add to their capital stock to meet expected higher aggregate demand. The rise in investment often accompanies an improvement in animal spirits, or optimism, among producers and also may lead to further increases in investment through the so-called accelerated effect. This recovery is a disappointing exception to the rule.
The NYT's Paul Krugamn says policymakers are ignoring basic economics by implementing austerity instead of more government investment:
We were suffering from inadequate demand. The financial crisis and the housing bust created an environment in which everyone was trying to spend less, but my spending is your income and your spending is my income, so when everyone tries to cut spending at the same time the result is an overall decline in incomes and a depressed economy. And we know (or should know) that depressed economies behave quite differently from economies that are at or near full employment... We needed more government spending, not less, to fill the hole left by inadequate private demand.
Meanwhile the NYT's Neil Irwin blames the weak recovery squarely on a decline of investment in the housing sector:
Investment in residential property remains a smaller share of the overall economy than at any time since World War II, contributing less to growth than it did even in previous steep downturns in the early 1980s, when mortgage rates hit 20 percent, or the early 1990s, when hundreds of mortgage lenders failed.
If building activity returned merely to its postwar average proportion of the economy, growth would jump this year to a booming, 1990s-like level of 4 percent, from today’s mediocre 2-plus percent. The additional building, renovating and selling of homes would add about 1.5 million jobs and knock about a percentage point off the unemployment rate, now 6.7 percent. That activity would close nearly 40 percent of the gap between America’s current weak economic state and full economic health.
You might want to check out this piece in TIME, where Sam Frizell argues the "new American dream" is living in a city, not owning a house in the suburbs. And finally, Alhambra Investment Partners' Jefferey Snider argues inequality and economic woes are the not the fault of markets, but of monetary policy:
The inability of the economy to create a wider circulation of jobs and earned income results in inefficiency and malaise, and that is a commentary against financialism, including stock prices that benefit only a narrow segment. That disconnect between prices and economic function reveals this because its source becomes fully apparent - monetarism. It is so very evident even in the governing and basic philosophy there, as these orthodox zealots even claim directly that we must place finance first before economy; that we need to stimulate lending above all else or the economy suffers. It is credit and debt and nothing more.
On the Pioneers Post, Isabelle de Grave takes a tour through the history of wealthy entrepreneurs turned philanthropists from Andrew Carnegie to Pierre Omidyar, then predicts an upcoming philanthrocapitalism boom:
These different influences are shaping today's approaches to philanthropy in the midst of a wealth transfer of gargantuan proportions. Years of accumulated wealth—in Europe and America—are about to change hands, as the post-war generation dies off. One estimate from a study in America, by Paul Schervish and John Havens of Boston College puts the size of the transfer likely to occur in the US between 1998 and 2052 as somewhere between $41 trillion and $136 trillion. There is an enormous amount of money available, and as an entrepreneurial culture takes root in the world of philanthropy, these may well be the boom years of philanthrocapitalism.
You might be interested in this new report from Monitor Deloitte, "Beyond the Pioneer: Scaling New Industries to Benefit the Poor." In the Stanford Social Innovation Review, Louis Boorstin warns readers that scaling supply chains and industries that benefit the poor isn't sexy:
What’s sexier: Investing in ventures that offer game-changing ways to deliver better health or education to the world’s poor, or improving industry-wide distribution channels, customer awareness, and quality standards for such ventures? OK, so that one’s a no brainer. Most of us would much rather play the part of the savvy impact investor than work to strengthen supply chains or enhance public goods... I contend that you cannot be a successful impact investor—by which I mean one who’s making a lasting difference, at scale, against the world’s tough social challenges—if you don’t deeply understand the context in which your investees are operating.
Also in Stanford's Social Innovation Review, the Hewlett Foundation's Larry Kramer challenges funders to embrace diffuse reciprocity (“a willingness to give without demanding a precise accounting of equivalent benefits for each action”) instead of resisting collaboration:
Consider what this could mean in the context of foundation grantmaking. Foundations work hard to ensure that grants have maximum impact in accomplishing the foundation’s strategic goals. They are, as a result, reluctant to make grants outside their defined strategies and (often highly) specified theories of change—even if that means losing opportunities to collaborate. But what if, in so doing, they are actually accomplishing less? Is it possible that, in seeking to squeeze maximum efficiency from every dollar this way, we achieve marginally greater short-term progress but sacrifice what economists call “gains from trade” that would leave everyone’s strategies more completely realized in the long run?
Heron investee Sustainability Accounting Standards Board announced Michael Bloomberg as its new board chair and former SEC chairman Mary Shapiro will also be joining the board. Veris Wealth Partners looks at how the domestic public equity segment of impact investing stacks up against traditional benchmarks. You also might interested in learning more about the Haas Socially Responsible Investment Fund managed by MBA students at UC Berkeley. For a deep impact investing dive not for the faint of heart, check out the fourth annual impact investor survey conducted by the Global Impact Investing Network and J.P. Morgan.
Slate's Jordan Weissmann, responding to Lowrey's NYTimes piece noted above, says even if material goods are cheap, the things that move people out of poverty are becoming less attainable:
Here’s what makes this trend so treacherous: Prices are rising on the very things that are essential for climbing out of poverty. A college education has become a necessary passport to financial stability. It’s hard to hold a job if you’re chronically ill. Working full-time is difficult if you can't pay somebody to watch your child. While a high-definition television is nice, it won’t permanently improve your circumstances. And psychology has told us that the stress of financial instability, of not knowing whether you’ll be able to pay your next bill or get enough hours at work, is part of what makes poverty such a horrible experience. Humans also tend to judge their experiences relative to their immediate surroundings, so the fact that the poor are materially better off than during the Carter era doesn't offer them much personal solace.
Jobless benefits are disappearing faster than jobs are appearing, writes Ben Casselmen over at FiveThirtyEight. And the NYT's Annie Lowrey reports that workers lucky enough to find employment are increasingly finding it in low-wage sectors because that's what this recovery is producing:
Economists worry that even a stronger recovery might not bring back jobs in traditionally middle-class occupations eroded by mechanization and offshoring. The American work force might become yet more “polarized,” with positions easier to find at the high and low ends than in the middle.
The swelling of the low-wage work force has led to a push for policies to raise the living standards of the poor, including through job training, expansion of health care coverage and a higher minimum wage.
The Motley Fool's Morgan Housel says the biggest threat to U.S. economic future may be long-term unemployment and America's growing dynastic culture:
New technologies that workers have mastered over the last few years are totally foreign to the long-term unemployed. That makes them less valuable to employers. Every day this continues it gets worse. I worry we're at a point where it's so bad it's unfixable, creating a black hole where millions of Americans will literally never recover from the financial crisis. People who could have grown their talents and made the economy better may be permanently held down. That hurts the growth outlook for everyone... Capitalism works best when the smartest people with the best ideas who work the hardest succeed in a meritocratic way. That's how it works most of the time in America, but there's a growing perversion where success has less to do with how innovative and driven you are and more to do with who your parents are. The single best predictor of future income is your level of education, and the one of the best predictors of your level of education is your father's income. Put these together and you don't get meritocracy, you get dynasty.
You may also want to check out this PBS broadcast with Gwen Ifil, where a panel of economic experts discuss alternatives to GDP for measuring prosperity. You may also be interested listening to this NPR panel on the plight of the middle class.