Rethinking the Economy

A few weeks ago, BusinessWeek ran a piece by Intel founder Andy Grove about how to create more jobs in the US. I held off reading it; I wasn’t interested in another diatribe about how we need to cut taxes on big business, create more “labor flexibility” by destroying unions, and general give Corporate America everything they want.

But it turns out that Grove is not your average CEO.

the great Silicon Valley innovation machine hasn’t been creating many jobs of late—unless you’re counting Asia, where American tech companies have been adding jobs like mad for years.

The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of startups to create U.S. jobs…

Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

The underlying problem: the rules are stacked in favor of off shoring manufacturing jobs.

Each company, ruggedly individualistic, does its best to expand efficiently and improve its own profitability. However, our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don’t just lose jobs—we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate…

We got to our current state as a consequence of many of us taking actions focused on our own companies’ next milestones. An example: Five years ago a friend joined a large VC firm as a partner. His responsibility was to make sure that all the startups they funded had a “China strategy,” meaning a plan to move what jobs they could to China.

How do we get out of this mess? Not by big corporate tax cuts but by rebuilding “our industrial commons.”

We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars—fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability—and stability—we may have taken for granted.

Grove’s strategy doesn’t address how we could at the same time ensure our brothers and sisters in China also get good jobs . But it’s still a pretty amazing statement from the head of one of the most successful US manufacturing companies in the last 25 years.

Via Bob Herbert, a Rockefeller Foundation study using a new index for measuring economic insecurity — the percent of Americans who had a net loss of 25% or more of their financial income — shows that for many Americans, life got less secure, not more over the last few decades:

In 1985, at a time when the unemployment rate was 7.2 percent, the portion of American families that would be counted as economically insecure by the terms of this new index was 12 percent. Professor Hacker explained that the percentage would naturally tend to rise or fall with improvements or a deterioration in the economy.

But what has happened over the past few decades is that the percentage of insecure Americans relative to any given level of the economy has tended to steadily rise. So in 2002, coming out of a mild recession, there was a 5.8 percent unemployment rate, but the percentage of economically insecure families had jumped to 17 percent.

All of the data for 2009 are not yet in, but the research team projects, conservatively, that more than 20 percent of Americans experienced a 25 percent or greater loss of household income (without a financial cushion) over the prior year — the highest in at least a quarter of a century.

A decrease of this magnitude in available income is a heavy blow. As the study points out, “The typical individual who experiences a decline of at least 25 percent in household income requires between six and eight years for income to return to its previous level.”

“What we’re seeing, basically, is what we’re calling ‘the new normal,’ ” said Mr. Hacker. “We’re slowly ratcheting up this level of economic insecurity.”

If you’ve been wondering what I mean when I say that we’re using the values of big corporations and the rich to shape the economy, this is Exhibit A.

Yesterday’s post, about how some regulations help businesses and save jobs as well as lives, was based on a theoretical example. But you can find plenty of examples in the real world. In 2007, for example, after years of pressing the Bush administration to strip away as many pro-consumer regulations as they could, some businesses started to lobbyfor new rules.

Last year, almost all of the nation’s spinach crop was destroyed after contaminated spinach from one 50-acre California farm sickened nearly 200 people in 26 states, killing a Wisconsin woman. It was the last straw for large growers, who now support mandatory safety standards.

Ditto for manufacturers who followed voluntary standards that their overseas competitors ignore it.

Concerns about competition have led to other proposals. As imports from China have grown in recent years, low-priced Chinese products that do not meet voluntary industry standards have motivated trade groups to seek new safety mandates.

After a series of recalls this year, for example, American toymakers recently asked the federal government to allow the Consumer Product Safety Commission to require premarket safety testing of all toys.

The all-terrain vehicle industry for years opposed mandatory standards dictating the way they build their machines. But the industry has changed course as it lost market share to lower-priced Chinese-made A.T.V.’s that do not meet voluntary standards, including some with inadequate brakes and top speeds that exceed guidelines.

“When you move from voluntary to mandatory you give the government policing power to make sure that products on the market meet safety standards — so we are all on a level playing field,” said Tim Buche, president of the Specialty Vehicle Institute of America, which represents companies that manufacture A.T.V.’s in the United States.

There are, of course, plenty of times when companies fight for regulations to try to stomp out competitors or give themselves a big advantage. But when we’re talking about trying to avoid another entire spinach crop being wiped out, it takes a pretty big tinfoil hat to see it as a corporate power grab. And I don’t think most of us care what manufacturers’ motives are if they are fighting for rules to make sure ATV brakes have to work.

In a recent Grist magazine interview, Newt Gingrich was asked:

You have supported nuclear, solar, wind, smart grid, and other emerging technologies. Do you see incentives as the only way to push these markets to evolve?

He replied:

Absolutely. There’s no evidence in American history that regulations and punishments work to create a better future.

Obviously you can write bad/stupid regulations that do damage to the economy and kill jobs. But not having smart regulations can just as easily kill jobs and damage our economic future.

Take lead in kids’ toys. Lead is very dangerous to kids, especially young kids. In high doses it can kill. In lower doses it can cause brain damage. And unlike many other toxins, the effect is cumulative — repeated exposure to small amounts of lead add up. Even very low levels of exposure can hurt kids; according to the CDC, “it must be emphasized that there may be no threshold for developmental effects on children.”

Suppose we didn’t have regulations banning lead in kids’ toys. What would parents who didn’t want their kids to be poisoned do? They could try to avoid buying lead-laced toys. But of course companies are going to lie or try to mislead parents. It’s hard to imagine Bratz’s makers running ads saying, “sure, Sasha and Jade have brain damaging lead in them, but if you let your little girls have these dolls, do you really care if your girls are that smart when they grow up?”

With this level of uncertainty, every time we had a scare about lead in a particular toy from a particular factory, odds are parents would panic and stop buying toys that could even possibly contain lead paint. It already happens once in a while now, like the big China scare back in 2007. Imagine what it would be like without any regulations or oversight.

At that point, “market discipline” would kick in — this panic would punish bad manufacturers. But it would also punish good manufacturers, because parents don’t know who to trust and therefore are understandably going to overreact. Small toy manufacturers, with tiny cash cushions and advertising budgets to counter and/or ride out the panics, would often get wiped out by these panics. So would small toy shops, which run on absurdly thin profits. In short: more damaged or dead kids, fewer small businesses, fewer jobs, and more scared parents.

Of course, not all kids would be affected equally. Because of market demand, services would spring up that would regularly test toys for lead. I’ll give you two guesses as to whether parents who are programmers and lawyers or parents who are janitors could afford either the services or the more expensive toys whose manufacturers could afford to pay for certification — or could afford to pay for frequent, expensive testing to see if their kids had been exposed to hard to detect but dangerous levels of lead.

This is a “better future” than one with regulations?

Professor Teresa Ghilarducci on a major piece missing from the finance Reform Bill: reinventing the 401(k).

In a perfect world, an average worker could amass something like $400,000 in a 401(k) by retirement. After nearly three decades of 401(k) contributions, though, the average account balance for people nearing retirement age is about $60,000, far less than what’s needed. So it’s no surprise that when a recent Gallup poll asked what Americans want most from government, more chose guaranteed pensions than guaranteed jobs or health care.
Most people save less than 5 percent of their income for retirement, and many start withdrawing funds early because of layoffs, divorces, and other unexpected events. The consequence of these 401(k) leaks is that workers retiring in 15 years will do worse than their parents and grandparents, according to the Center for Retirement Research at Boston College. Almost two-thirds of households will probably face declining living standards in retirement.

401(k)s may be failing most folks, but they’ve been a great subsidy for folks with higher incomes:

All the tax-free contributions going into 401(k)s, Keoghs, and other retirement schemes reduce federal tax receipts by $193 billion a year. And almost 80 percent of the tax breaks go to the top 20 percent of taxpayers.

Her solution: create a “government-guaranteed alternative consisting of diverse and prudent assets such as blue-chip stocks and corporate and Treasury bonds.”

let’s scale back the tax breaks. Instead, we can use the money to help everyone sock away 5 percent of their pay in safe retirement accounts that would serve as a universal supplement to Social Security. People could keep their employer plan if it met more stringent standards such as a contribution rate of at least 5 percent, a ban on early withdrawals, and conversion into an annuity at retirement. Anyone without an employer plan would automatically be enrolled in a Guaranteed Retirement Account to which employees and employers would each contribute 2.5 percent. The government would then provide everyone a modest tax credit to offset the employee contributions. The return would be guaranteed by the government at about 3 percent above the rate of inflation–or close to the real growth rate in gross domestic product.
The key to this proposal is pooling individual accounts. These would be professionally managed, but with trillions of dollars in the pools, management fees would be lower than on conventional retirement accounts. That means every dollar in tax breaks would translate into almost a dollar in retirement income instead of going toward fees or being diverted to other purposes by people who make withdrawals before retirement. National savings would get a boost. All Americans, including the 64 million who have no pension plan, would get one at no extra cost. What’s not to like?

I’d add one more thing to the mix — an option to put your retirement money into a plan that used the same investment strategy as the main plan but whose investment managers use the stock to push companies to act in a long-term, socially responsible way. That way, you wouldn’t have to worry that your retirement money would be used to push your company to, say, fire your ass when you hit 50 or would encourage Wall Street to push for another round of the deregulation that created the financial meltdown. Overall, though, a very smart idea.

My latest idea for tinkering with the values-based framework — reorganize v 0.1 so instead of having a section on myths followed by a section on alternatives, break it into pairs of myths and alternatives.

NOTE: This post is mostly for me — to help me get this next step out of my head and put it down on paper — so I’m using a lot of shorthand that may not be clear. Once I’ve got a better idea of what I’m really arguing, I’ll spell it out so it’s easier to understand.

Introduction
Our debate about the economy the economy is shaped by 3 myths that tilt the playing field in favor of the values of people with power — big corporations and the rich. If we stop believing these myths, we can develop an alternative way of talking about the economy that could give everyone a real say in choosing the values that shape our economy.

Seriously freaky:

I bumped into this because I want to see if Emotiv, a company that’s trying to create off the shelf mind-controlled gaming tools, had gotten any further since they blew their much-hyped launch a year or two ago. I’m interested because if I could read rss feeds & surf the web without using my messed up hands or voice recognition, I’d be a happy camper.

When Emotiv realized they couldn’t pull off their launch, they did something very smart — they created a developer software development kit and started selling the sucker for very little money, encouraging geeks to start coming up with cool stuff. I think virtually everything the guy’s using is off the shelf glued together with some geeky coding.

Of course the video also looks like the first few minutes of a $1,000 budget Grade C horror movie….

Another interesting example, which looks more like performance art:

A great example of what’s possible when you use a decentralized, socially networked approach to unleash folks’ creativity.

One other interesting point from Desai, Brief, and George’s paper, on the problems with relying on the actions of individual corporations to stop the crazy CEO compensation problem we’ve got:

J. P. Morgan declared that top executives’ compensation should be capped at twenty times the wage of an average worker. However, unless all organizations adopt this rule, capping an executive’s wage will put a firm at a competitive disadvantage.

For instance, consider the case of Whole Foods Market Inc. In the 1980s, the salary of its CEO was pegged at 8 times the pay of the average worker. However, when its executives were persistenly made strong offers by its competitors, Whole Foods Market relented and raise the cap on executive compensation to 19 times that of the average worker. Other firms, such as Ben & Jerry’s, Herman Miller Inc., and Costco Wholesale Corp., that have tried to implement similar strategies of capping executive excess have also had limited success.

That said, it is worth noting that the success that many major baseball and other sports leagues have had in imposing a limit on their teams’ salaries is impressive. If businesses were to emulate them and simultaneously adopt such a policy, they may be more successful at limiting executive pay.

In other words, For Some Choices We’ve Gotta Choose Together.

Plenty of studies have shown that when CEOs get insanely big paychecks, it doesn’t pay off in terms of performance — in short, it’s bad for shareholders. Now comes a study from Desai, Brief, and George that shows it’s bad for employees too.

higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers. We present findings from two studies—an archival study and a laboratory experiment—that show that increasing wage disparity results in executives behaving meanly toward those lower down the hierarchy.

Using 2007 data from Kinder, Lydenberg, Domini & Co. (KLD) Company Profiles, a database of 650 firms that “is currently being used by approximately 150 investment firms to evaluate stakeholder performance for social choice funds,” they analyzed how “mean” CEOs were. What do they mean by “mean”? Bad union relations, substantial fines/penalties for willfully violating employee health and safety standards, mass layoffs, and substantially underfunding pensions or inadequate retirement benefits. Controlling for company size, age, performance, risk, and industry type, they found the following correlation:

the higher the level of CEO compensation, the meaner the behavior of the organization toward lower level participants

They followed up with a lab experiment to try to show that compensation could actually be driving “means” behavior.

You might say, this is a big surprise? You also might point out that many folks — including people who aren’t assholes — wouldn’t buy a definition of “mean” that includes mass layoffs and poor union relations. But it’s still an entertaining study.

What I found more interesting was the paper’s review of the literature on power and behavior. For example:

Recent research on nonconscious processes has documented that people with high power are more likely to engage in automatic processing of social information as compared to those with less power, who are more likely to engage in careful, systematic processing of information (Keltner, Gruenfeld, & Anderson, 2003).

Similarly, evidence for what you already knew if you’ve ever worked for a boss like this:

Stereotyping subordinates and thinking of them as being less capable and less human justifies existing power differentials and helps minimize threats to power roles. Actively denigrating subordinates can then serve to remind other employees who is in power. Fast and Chen (2009) found that such aggressive tendencies are exacerbated when the perception of power is coupled with a perception of being incompetent, when the ego of the power-holder is likely to feel threatened.

Dilbertonomics, anyone?

You probably know the oil industry gets a lot of subsidies. But you may not know that, according to the New York Times,

an examination of the American tax code indicates that oil production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process.

For example, by leasing the oil rig that caused the disaster, BP

used a tax break for the oil industry to write off 70 percent of the rent for Deepwater Horizon — a deduction of more than $225,000 a day since the lease began.

Another great scam:

Because of one lingering provision from the Tariff Act of 1913, many small and midsize oil companies based in the United States can claim deductions for the lost value of tapped oil fields far beyond the amount the companies actually paid for the oil rights.

Overall,

According to the most recent study by the Congressional Budget Office, released in 2005, capital investments like oil field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry.

And for many small and midsize oil companies, the tax on capital investments is so low that it is more than eliminated by various credits. These companies’ returns on those investments are often higher after taxes than before.

On top of that, rig owners drill for oil in American shores while flying the flag of another country and putting the headquarters overseas, all to radically cut their taxes.

I’m sure any day now conservatives — especially those rabidly free-market Texas conservatives — will put an end to this corporate socialism.