Must Reads: If you read one thing this week, your editor suggests this piece in Pensions and Investments, where Scott Kirby discusses a very "straightforward approach to impact investing" by starting with the U.S. fixed-income portfolios that most institutional investors already have. In this fascinating piece in the Wall Street Journal, PayPal's Peter Thiel explores what "creative monopolies", dynamism and caring for workers have to do with one another. You also might be interested in this piece from Edward Glaser in City Journal discussing lessons learned from city U.S investments infrastructure and how they could help the poor around the world.
Let's start with a cartoon from Andy Singer over at Cagle post:
In the New York Review of Books, businessman and philanthropist Lewis B. Cullman is not keen on foundations but like donor advised funds even less, calling them a "misuse of philanthropy":
Recent estimates indicate that at least $700 billion is tucked away in private foundations, money that could be doing good for charities and for the economy—and you and I as taxpayers have underwritten the tax benefits awarded those foundations... Donors get the same tax benefits when they give to a DAF that they would get by contributing to a museum, soup kitchen, university, or any other federally accepted charity. But rather than having the gift made directly to a charity, the funds can simply sit in the account awaiting instructions from the donor. If the donor never gets around to making distributions, they stay in the account earning substantial fees for investment managers... The 1969 Tax Reform Act set the rules for private foundations, but at that time there was no mention of DAFs. Professor Ray Madoff at Boston College Law School has long argued for laws that require timely payouts from DAFs; she says that there is now more than $60 billion tied up in them, and that the amount of money involved is growing at a high rate. Rather than the American people benefiting, it’s Fidelity and others who are thriving.
In the past couple of weeks, some institutions were under fire over how they handle their endowments/trusts. Does Harvard need nonprofit status? No, says Annie Lowrey in New York Magazine:
Harvard is a real-estate and hedge-fund concern that happens to have a college attached. It has a $32 billion endowment. It charges its rich students — and they are mostly from rich families, with many destined to be rich themselves — hundreds of millions of dollars in tuition and fees. It recently embarked on a $6.5 billion capital campaign. It is devoted to its own richness. And, as such, it is swimming in cash... All that money can have some perverse effects. Harvard, for instance, has purchased a tremendous amount of land in Cambridge and the surrounding towns — pushing up real-estate prices without contributing much, if anything, in property taxes. If the school lost its nonprofit status, it would owe the state of Massachusetts $80 million a year.
Check out Ron Unz's opinion on Harvard in the American Conservative:
[D]uring the 2008 Financial Crisis, Harvard lost $11 billion on its net holdings, teetering on the verge of bankruptcy as its highly illiquid assets could not easily be redeployed to cover hundreds of millions of dollars in ongoing capital commitments to various private equity funds. The desperate hedge fund—ahem, academic institution—was forced to borrow $2.5 billion from the credit markets, lay off hundreds of university employees, and completely halt construction work on a huge expansion project, ultimately surviving and later recovering in much the same way as did Goldman Sachs or Citibank. During all these untoward events, the dollars being paid in by physics majors and being paid out to professors of medieval French literature were of no significance whatsoever... It is commendable that so many former students feel gratitude to their academic alma mater, but personal loyalty to a wealthy hedge fund is somewhat less warranted, and if Harvard’s residual and de minimis educational activities provide it with enormous tax advantages, perhaps those activities should be brought into greater alignment with benefit to our society.
Back in August, the Nation's Charles Piller renewed the debate over Gate Foundation's investment holdings, arguing they may "subvert the foundation's good works":
Bill and Melinda Gates oppose tobacco use and the foundation has no such investments. But its stake in manufacturers of military equipment—including Caterpillar—weapons and alcoholic beverages exceeds $1.2 billion. The foundation says that it must guard against inevitably lower returns from a portfolio that tries to reduce social harm. That tired argument has long since been debunked. Not every mutual fund structured to reduce harm to the environment, to support good governance and fairness to a diverse labor force, and to create safe products outperforms funds designed purely to maximize returns. But many do...Even if social investing shaved a thin slice from the bottom line, harm reduction would better support the Gates Foundation’s oft-stated goal, that “every person deserves the chance to live a healthy, productive life.” The foundation has also said, correctly, that choosing “good” versus “bad” companies can be a perilous business. Undeniably, there are shades of gray in the world of investing. But to use complexity as an excuse for doing nothing—for rejecting the opportunity to lead—seems a shortsighted approach.
Meanwhile, Fortune's Allan Sloan says bah humbug to corporate tax inversions:
Wall Street firms get rich advisory fees and financing fees from inversions. Hedge funds, takeover trolls (who call themselves “activist investors”), and other institutional investors—all part of Wall Street—can get a quick boost to their investment performance, which helps them generate bigger fees and attract more investor money. Board members and top executives of corporations that succumb to inversion mania get rich subsidies from the firms’ shareholders, who typically give them special payments to cover the excise taxes they owe on their restricted shares and options when the inversion happens. For example, Medtronic, a big medical-device company that wants to invert, estimates that it will give $63 million of nondeductible payments to its top executives and directors to cover their excise taxes and the taxes they will owe on their excise tax subsidy. Meanwhile, retail investors who hold Medtronic in non-retirement accounts will pay taxes on shares they own directly, and will pay taxes indirectly on shares owned by mutual funds they hold...Once again, Wall Street gets its way, while responsible Main Street folks get screwed. Let’s stop this inversion farce now, fix the damn corporate tax code, and get back to the business of growing our economy and improving our lives.
Over at Brookings, researchers note that while unemployment fell 23 percent between 2010 and 2013, poverty fell just one percent. And at Bloomberg View, Mark Whitehouse reports that America's poor are deeper in debt than ever:
FiveThirtyEight's Ben Casselman and Andrew Flowers look at the rise in inequality post recession:
For many families, the recession never ended. In 2013, the median (or typical) American family’s annual income was about $46,700. That’s down from $53,100 in 2007, before the recession began, and down from $49,000 in 2009, after it was officially over. (All figures have been adjusted for inflation.) In other words, median U.S. household income has fallen 5 percent during the recovery. The story is much the same for net worth, the value of a family’s assets (cash, stocks, retirement accounts, home equity) minus its debts (including mortgage debt). The median family’s net worth was $81,200 in 2013, down slightly from $82,800 in 2010 and down a whopping 40 percent from before the recession began.
Over at Bloomberg, former Seventh Generation founder Jeffrey Hollander opines on inequality and what business people can do about it themselves, including ensuring that there is a living wage and that "every employee is an owner." He also says "we have gotten carried away with our own greed and have lost our moral compass." In this infographic, Moyers and Company offers six ways to tackle "high inequality":
Last month, the Peterson Institute's Caroline Freund and Sarah Oliver argued there is a major gender gap being overlooked in the inequality debate over who is on top:
A clear but often overlooked feature of this discussion is that the fantastic gains at the top of the distribution are almost entirely accruing to men. One reason it is overlooked is that income and wealth inequality are measured at the household level. But one person in the household typically earns and controls the money, and that person is almost always a man. The concentration of income and wealth in the hands of men should reinforce the call to undertake greater redistributive policies. The Forbes billionaires list, a small group that controls 3 percent of global household wealth and whose total net worth amounts to about 9 percent of world GDP, highlights this issue.1 Female billionaires make up only about 10 percent of the total entries on the 2014 Forbes World Billionaires list (table 1). That the accumulation of extreme wealth is almost all by men is of concern for two important reasons. First, social injustice—like inequality more specifically—foments discontent. The lack of diversity in the highly influential elite of each country means that its values and interests are especially unlikely to reflect those of the rest of the population. A second issue is discrimination; an elite would be less worrisome if everyone has some chance (even if very small) to become members.
Apparently the jobs crisis is global reports AFP:
In a study released at a G20 Labour and Employment Ministerial Meeting in Australia, the Bank said an extra 600 million jobs needed to be created worldwide by 2030 just to cope with the expanding population. "There's little doubt there is a global jobs crisis," said the World Bank's senior director for jobs, Nigel Twose. "As this report makes clear, there is a shortage of jobs — and quality jobs. "And equally disturbingly, we're also seeing wage and income inequality widening within many G20 countries, although progress has been made in a few emerging economies, like Brazil and South Africa."
Meanwhile, CNBC's Kate Rogers notes U.S. small business hiring has been flat for the last year for a number of reasons, including healthcare costs, the minimum wage potential increase, and "red tape." Over at the New Republic, Oxford philosopher Nick Bostrom offers another look at the robots and jobs debate:
It takes decades to make a new, functional, adult human, and even then, the person starts off having forgotten everything their parents learned. It’s not easy to create a new worker in this way. But if the worker were a piece of software, then the employer could just make several of them in the course of minutes. In a lot of these models [for the expansion of artificial intelligence], you have what amounts to a population explosion of digital minds, to the point where you drive down the wages to subsistence level. The subsistence level for digital minds would be a lot lower than for biological minds. Biological humans need to have houses—we need to eat, we need to transport ourselves. Digital minds could earn, like, a penny an hour. The wage level would fall; humans could then no longer earn a wage income. It looks very questionable, in this free-for-all competitive world, that we would find a niche for our small, stupid, obsolete minds.
The Wall Street Journal's Sven Boll talks up the power of vocational schools saying Americans need to re-embrace attending to address the so-called skills gap. But the Center for Economic Policy Research says the skills gap issue might be a lot of hooey (yes it is a word):
If employers can't get enough workers then we would expect to see wages rising in manufacturing. They aren't. Over the last year the average hourly wage rose by just 2.1 percent, only a little higher than the inflation rate and slightly less than the average for all workers.
You also may want to check out this TED talk by Robery Neuwirth on the informal economy and why it may be the key to providing jobs to millions of workers:
We're all focusing on the luxury economy. It's worth 1.5 trillion dollars every year, and that's a vast amount of money, right? That's three times the Gross Domestic Product of Switzerland. So it's vast. But it should come with an asterisk, and the asterisk is that it excludes two thirds of the workers of the world. 1.8 billion people around the world work in the economy that is unregulated and informal.