Author: ken

Beyond Inequality

Inch by inch, bit by bit, the American dream has faded away.

To be sure, high degrees of inequality, along with injustice and discrimination, have never been uncommon in America. And our culture has frequently been marred by meanness, shallowness and violence. Despite those flaws, however, many of us felt an underlying buoyancy and optimism – a faith of sorts in what’s possible in America. But now that’s getting harder and harder to sustain as economic opportunity slips from our grasp.

Our middle class is falling behind, despite working harder and harder. A recent report noted: “the American worker toils, on average, 4.6 percent more hours than a Canadian worker, 21 percent more hours than a French worker and an astonishing 28 percent more hours than a German worker.”

Our life expectancy is now lower than Canadians and Europeans and our children more likely to die. Moreover, as Nicholas Kristof pointed out recently, “while our universities are still the best in the world, children in other industrialized countries, on average, get a better education than ours . . . . Most sobering of all: for people aged 16 to 24, Americans ranked last among rich countries in numeracy and technological proficiency.”

Inequality remains a problem, and Kristof brings that home to us with a few stunning facts:

“ The top 1 percent in America now own assets worth more than those held by the entire bottom 90 percent.

“ The six Walmart heirs are worth as much as the bottom 41 percent of American households put together.

“ The top six hedge fund managers and traders averaged more than $2 billion each in earnings last year.”

But our increasing awareness of income inequality is counterproductive, he argues, implying we blame the rich for their success, rather than focusing on the ability of others to succeed. More importantly, it distracts us from the more important issue, the drying up of opportunities to thrive. Without that, the middle class will become increasingly demoralized and weakened.

The Nobel Prize-wining economist, Michael Spence, writing for Project Syndicate commented on the kind of inequality that matters: “Inequality based on successful rent seeking and privileged access to resources and market opportunities is highly toxic with respect to social cohesion and stability – and hence growth-oriented policies.” In short, without the ability to grow we lose a safeties and securities of society.

Kristof concludes, “Unfortunately, equal opportunity is now a mirage. Indeed, researchers find that there is less economic mobility in America than in class-conscious Europe.”

Clearly, America, is still the most powerful nation in the world, and our economy is still number one. But those facts do not promote a sense of confidence and well-being when people feel stuck at the bottom of the economic ladder.

Lacking opportunity erodes the will to succeed. It also promotes cynicism about our system. Worse, it means that those who are bitter and frustrated with their lives will eventually seek outlets to express their resentment. This can lead to more extreme splinter groups, further polarizing our politics and incapacitating the ability of legislatures to introduce constructive policies and programs.

It can also encourage individual acts of violence and illegal activities.

Those are often the only “opportunities” that seem available to those without viable economic choices.

Stranded on the Margins of Consciousness?

We can usually handle two sets of opinions, without having to conclude that one is wrong. But what about two truths, two conflicting sets of facts?

We have started getting accustomed to two truths about unemployment: the official government statistics that count the people looking for work and, then, the “adjusted” figures that include the profoundly unsettling numbers if those who have given up looking. Much of the media – at least the liberal media – have noted the second set of figures when the official ones are released, but every time we have to be reminded that the story is worse than it first appears.

It’s not hard to image the motivation behind the persistence of this disparity. Among other things, we all prefer the more optimistic story – and government officials do too, as that makes them look better as well.

Now we are confronting two truths about corporate taxes, as Andrew Ross Sorkin reminds us. “For years, chief executives have complained bitterly about the United States corporate tax code, arguing that it is too complicated and that rates are too high . . . . It is a compelling narrative.” But, Sorkin mildly notes, “it may be wrong.”

The official tax rate for corporations is 35%, but Edward D. Kleinbard, a professor at the Gould School of Law at USC and a former chief of staff to the Congressional Joint Committee on Taxation, comments: “Whether one measures effective marginal or overall tax rates, sophisticated U.S. multinational firms are burdened by tax rates that are the envy of their international peers.”

“What?” exclaims Sorkin in mock astonishment, noting Kleinbard’s revised figures: “Companies paid, on average, 12.6 percent, according to the Government Accountability Office . . . by deliberately stashing piles of cash abroad.”

It’s not difficult to grasp why companies continue to complain about a system they have successfully gamed. By keeping up a barrage of attacks, they preempt efforts at reform that could lead to higher and more appropriate taxes. Moreover, since voters dislike taxes themselves, they tend to be sympathetic.

But, more interesting is why we keep two sets of records. My guess: Because two competing truths keep us befuddled, uncertain or confused, as a result of which we are more likely to dismiss the issue. It is difficult to get upset or take action about what we don’t clearly understand.

Those who issue the official figures are clearly not guilty of fraud. Facts are facts. To be sure, it’s not their job to provoke action of, even, stimulate discussion and debate. But they are unconsciously complicit in furthering confusion and inhibiting action. It is very clear that very few corporations, legislators, regulators or other officials want the tax system to change.

Kleinbart notes that our tax system “is highly distortive and inefficient.” That is how it “growed,” over the years, responsive to lobbyists, special interests, donations to congressional campaigns

But to whom, then, can we turn for the kind of understanding we need, the common sense grasp of economic issues that professional experts have little interest in providing?

Avoiding Bankers

It’s a crude idea, an inelegant metaphor, but it makes a lot of sense.

At a time when the financial industry appears to have a lock on mergers and acquisitions, always looking for ways to increase the value of investments in stocks while skimming off profits for themselves, the technology industry is taking another path. And it is introducing a dose of common sense. Google’s Larry Page calls it the “tooth brush test.” In contemplating an acquisition, he asks: “Is it something you will use once or twice a day, and does it make your life better?”

Maybe it is because technology companies have confidence in their analytic skills and capacity to innovate, maybe it is because they are not intimidated by banks, maybe they just believe in the simple idea that value comes from things that work, from function, not perception, but, whatever, they are growing without the financial industry. “Mr. Page is looking for usefulness above profitability, and long-term potential over near-term financial gain,” reported The Times.

This is a refreshing idea in an age of “investor capitalism.” They are hiring their own financial analysts as needed, doing their own due diligence, finding their own partners. In the process, they are avoiding many of the pressures from intermediaries to make the deal work, as well as the risks of insider trading and manipulated prices that have been hallmarks of the financial industry.

“Amin Zoufonoun, Facebook’s vice president for corporate development, said some bankers would come in and pitch acquisition candidates . . . [But] instead of trying to swallow already established Internet brands, Facebook uses acquisitions to make big bets on the future and plug technical holes.”

When “big tech companies are looking to grow through acquisitions, it is the culture and vision, not the earnings and revenue, that are of paramount importance.” They are not looking to slash payrolls, break up functioning entities or plunder assets.

And it’s often cheaper. The Times noted “Cisco, which has acquired more than 170 companies, decided it was more efficient — and more economical — to hire its own full-time bankers rather than pay millions of dollars in fees each time it struck a deal.”

As a result of all these factors, “Deals with unadvised buyers are increasing rapidly. The acquiring company did not use an investment bank in 69 percent of American technology acquisitions worth more than $100 million this year, according to Dealogic. That number was 27 percent 10 years ago.”

News travels fast in Silicon Valley. Many people in technology start-ups know each other. It’s a smaller world. And, to be sure, many newcomers start companies with the goal of being bought out. But it seems that the truly important thing at the top is that the industry wants to grow and become more effective and powerful – not just make a buck.

After Ferguson

In the aftermath of the violence in Ferguson, Missouri, we have the beginnings of a long-overdue national discussion about the militarization of local police forces.

Even Rand Paul has weighed in on this issue in Time: “There is a legitimate role for the police to keep the peace, but there should be a difference between a police response and a military response.” He sees an undo influence of big government, all too eager to weaponise local police. But what is the fundamental difference between the police and the military?

Is it the nature of the weapons they should use? The underlying issues they are there to address? The level of violence they face?

All these are useful questions. But the key point is that whatever force the police use has to be legitimate in the eyes of the public they monitor and guard. Their power, ultimately, is authorized by those who are subject to it. Without that, they lack the essential, effective means they need to do their job. By contrast, the military engages in war with enemies, those who, by definition, do not accept their authority.

When people feel government is legitimate, they may question specific laws, may grumble and contest, but they have a voice in making them and they have redress when wrongly used. Legitimate force helps them feel more secure. To be sure, that doesn’t always work. We all have an anti-authoritarian streak. We enjoy getting away with infractions. But that’s the baseline, the tacit agreement we have with government.

Without legitimate authority, citizens would have to be persuaded in every case to obey the laws, to follow rules. In a legitimate state, they don’t usually stop to think if they will obey. Authoritarian rule, on the other hand, gives them no voice. They obey out of fear. And they fight back, given the chance, in riots, in anonymous acts of sabotage and non-compliance.

Rand rightly calls attention to the fact that the underlying problem in Ferguson is racism: “Given the racial disparities in our criminal justice system, it is impossible for African-Americans not to feel like their government is particularly targeting them.”

They riot, in other words, because they have no voice. They do not see the police as legitimate, so much as an occupying army.

But the really interesting point here is that the police seem to think similarly. That’s why they accumulated an arsenal of weapons supplied by the Pentagon, and acted fearfully and brutally. As a result, the imagery and the eye-witness accounts have borne an uncanny resemblance to scenes from Gaza and Aleppo.

I do not think that government is the problem, but government can only be as intelligent and thoughtful as we are. Those who act on its behalf need to more fully grasp the nature of the contract that is the essential basis for their power, not the machine guns and armored vehicles they can deploy to threaten and terrify.

The Underlying Pressure

Mergers are hot again: According to Thompson Reuters, “so far this year, $2.2 trillion in deals has been announced globally.” But nothing brings home the irrational frenzy of today’s Investor Capitalism so much as the impressive scale of some of the failures.

The combination of Publicis and Omnicom, two of the largest multinational advertising firms, fell though a couple of months ago for internal reasons that could have been anticipated. Rupert Murdock’s effort to acquire Time Warner came apart not just because of that company’s resistance to the takeover but because shareholders were not impressed, while Sprint’s offer for T-Mobile, also collapsed, perhaps because of the threat of government opposition.

The Chairman of the FCC commented acerbically: “Sprint now has an opportunity to focus their efforts on robust competition” – implying that the merger was a way to avoid what. And that suggests how much the current merger mania may be fueled by the hope for quick profits.

The DealBook writer in The Times cautioned: “The danger with a mergers-and-acquisitions boom is that chief executives could allow themselves to get carried away by the thrill of the hunt, reducing their focus on internal investment projects that might have a better chance of bearing fruit.” But is it the hunt that excites them so much as the shortcut they see to growth?

The Times went on to comment: “some chief executives may have come to view takeovers as the only way to obtain big increases in revenue in a still lackluster economy.”

Some investors say they see signs of irrationality. No surprise as such signs are everywhere. David Einhorn of the hedge fund Greenlight Capital recently observed that some companies he is betting against — or selling short, in Wall Street parlance — have become the targets of takeovers, even though, in his view, they have significant weaknesses. “Companies we are short often have serious problems, of which the boards and management are probably aware,” he wrote in a recent letter to investors in his fund. “This makes them more eager than usual to sell at any sort of premium.”

In today’s markets, the least attractive path to growth is the patient, slow process of building a business. That’s what most managers like to do, developing their skills as they solve problems, expanding their markets as they learn more. That’s what workers like to do, becoming more proficient as they engage their tasks. Even executives like the experience of thinking about future directions to take as they gain greater and greater understanding of the competition as well as the opportunities provided by changing demographics, improved technology, and customer demand.

But investors who are now, increasingly, in charge of policy, only want the stock price to go up. They pressure top management to embrace strategies that have the sole aim of increasing “shareholder value.”

Most signs point to businesses now being more efficient and profitable. Profits are piling up, but that is now less a sign of success as a dilemma for management. Distributing profits in the form of dividends does not appeal to investors. Diversifying for safety isn’t sexy. Research takes too much time. Nor do investors want businesses to burden themselves with salaries and benefits for workers.

On the other hand, they are not against bonuses, stock options and benefits for senior management, the ones who can look for mergers or aquisititions to capture headlines and excite analysts.

No wonder senior management is feeling pressured into making hasty deals.