Author: ken

Magical Thinking in Kansas

There are two big ideas that don’t make sense but sometimes work in the world of macro-economics: cut taxes to increase revenue and spend money you don’t have to increase growth.

The second is a staple of Keynesian thinking, and the U.S. government employed it in its stimulus package of 2008 to get us out of the Great Recession. The basic idea is to prime the pump, using water to get the well to start producing more.

The first is a staple of conservative policy, and it includes the notion that smaller taxes will force the government to cut back, always a good thing for conservatives who tend to view government as the problem. But, then, so the theory goes, businesses and individuals will have more money to spend and that will grow the economy.

Being somewhat paradoxical, these ideas need to be applied carefully. Spending money you don’t have can lead to inflation and burdensome debt. Cutting taxes can reduce the government’s ability to pay its own employees and provide essential services, further injuring the economy.

So it was something of a shock when the governor of Kansas pushed for dramatic tax cuts in 2012 with absolute faith in the counter-intuitive idea that cutting taxes would increase revenue: “Our new pro-growth tax policy will be like a shot of adrenaline into the heart of the Kansas economy.”

But as The New York Times pointed out in a sharply worded editorial this week: “the growth didn’t show up.” In fact, in the last six months when unemployment declined throughout the country, Kansas was “one of only five states to lose employment . . . . It has been below the national average in job gains for the three and half years Mr. Brownback has been in office. Average earnings in the state are down since 2012, and so is net growth in the number of registered businesses.”

I suspect The Times enjoyed the opportunity to demonstrate the falsity of that conservative cliché, what it called the governor’s “magical ideology,” while the “evidence of failure is piling up” and his “re-election campaign is faltering because of his mistake.”

But the point is that no one understands the economy well enough to speak with arrogant certainty about how it works. Economics is not a religion, without evidence of its efficacy. Besides, there are competing interests and warring sectors, that make it impossible to prescribe one definitive solution to all our needs. Rich and poor do not want or need the same things.

Sometimes the media paper over our differences and our conflicts by talking about “The Economy” as if we all participated equally in its triumphs and failures. The jobless figures do introduce discordant notes, but even there it ignores the critical differences between the chronic, long-term unemployed, the unemployable, and the part-time employees who have settled for the jobs they can get and given up on the jobs for which they are qualified.

I can appreciate that given the complexity of our problems, our divisions and conflicts, we might want to settle for the appearance of certainty – even when unwarranted. And others may be impressed by the convictions of politicians, even though they may not understand the issues they appear to address.

But we need more.

“John Henryism” and Other Syndromes

A team of psychologists set out to study the resilience of high achieving disadvantaged youths, starting with the assumption that their “success stories also translated into physical health benefits.” As the New York Times put it in its account of the research: “These young people were achieving success by all conventional markers: doing well academically, staying out of trouble, making friends and developing a positive sense of self.”

“When we looked beneath the surface, though, these apparently resilient young people were not faring well. Compared with others in the study, they were more obese, had higher blood pressure and produced more stress hormones (like cortisol, adrenaline and noradrenaline). Remarkably, their health was even worse than peers who, at age 11, had been rated by teachers as aggressive, difficult and isolated.”

The researchers speculated about the causes: the students felt tremendous internal pressure to succeed as they were the first in their families to attend college. Then, many felt socially isolated and disconnected from peers as a result of racism and ethnic discrimination. (See, “Can Upward Mobility Cost You Your Health?”)

One of the study’s authors, Sherman A. James, a sociologist at Duke University, calls this single-minded determination to succeed and uncompromising work ethic, even in the face of overwhelming odds, “John Henryism,” after the legend of a black railroad worker who defeated a steam-powered drill only to drop dead of exhaustion.

But is this true only for African-Americans? And what about other minority groups? To be sure, Professor James’ speculations seem plausible, but there may well be additional consequences and other causes: peer group disapproval of those who excel, as well as the inherent pressure of competition itself and the fact that those who achieve high grades at school know that they face life-long pressures to continue achieving in highly competitive careers.

And what about parental ambivalence? I recall that much as my father insisted his son get the education that had been unavailable to him in “the old country,” he felt threatened by my success and never asked a question about what I did.

And then there are the more subtle consequences that show up years later as self-defeating behaviors, depression, anxiety, and exhaustion, as well as parental neglect – or over-involvement.

Counseling can be valuable but there is a cost to progress, and sometimes it is a price we have to pay.

Everybody Loses

The conventional argument against high speed trading is that it gives an advantage to those with faster technology, not better judgment. It’s unfair. It’s analogous to insider trading, using information not generally available – in this case, milliseconds before it is available to others.

In Flash Boys, Michael Lewis, describes the ingenious technology and shows how it skims profits off the trades of others, working in effect as a tax on the system. He calls it “legalized theft.”

But in his review of Lewis’s book, James Surowiecki noted an even more insideous problem: to sniff out market prices in the process of trying to beat them, high speed traders flood the market with fake orders. They are looking to cheat the market, but, worse, they actually distort the market with spurious activity.

Surowiecki notes “Most high-frequency traders aren’t interested in the real economy at all. They aren’t concerned about a company’s earnings, or its future prospects. The only information that they’re interested in, and that they devote so much energy and money to uncovering, is information about what other investors are going to do.” In that way, they represent the vanguard of investor capitalism, in which the goal of investment is entirely to profit from trading, without regard to its social purpose or value.

He notes that high speed trading now accounts for about half of all stock market activity, and adds: “one recent study of trades in 120 randomly selected Nasdaq stocks found that increased high-frequency trading cost the average institutional investor as much as $10,000 a day.”

Trading in stocks has come a long way from the informal deals made under the buttonwood tree on Wall Street two hundred years ago. It quickly became centralized and regulated – but now it is going in the other direction. Public exchanges are proliferating and globalizing — there are 13 in the U.S. now — competing with each other for bigger shares of the market in markets. Moreover, there are over 40 private markets, “dark pools,” making regulation virtually impossible. Computers and electronic communication have amplified and globalized the process, increasing the chance of manipulation.

The relationships between buyers and sellers are increasingly irrelevant. As Surowiecki noted: “trading is entirely automated—humans may come up with the algorithms that the computers use, but machines do all the trading.” As a result, new glitches occur, such as the “flash crash” of May 6, 2010, when the Dow plunged more than six hundred points in a matter of minutes, and many high-frequency firms just stopped trading. That, in turn, accelerated the decline and made it harder for prices to return to normal.

There has always been a powerful destructive side to capitalism. As productivity soared and new wealth was created, environments were polluted and workers impoverished. This, though, may be different in that the financial system itself is being polluted.

High speed trading with its exclusive focus on maximizing investment returns may make it harden to direct capital where it is most needed or would be socially productive. And it may end up driving all but those who can afford it out of financial markets, as people conclude there is no point in trying to compete with complex algorithms and powerful computers.

In the long run, Surowiecki concludes: “Making investing less valuable will make people less willing to invest.”

What It Takes – and Why It Usually Doesn’t

Social responsibility costs money, so how do corporate boards reconcile the demand to increase shareholder value with the price of protecting the environment and concern with the safety of workers. Most don’t try very hard, according to the Harvard Business Review.

“Recent surveys suggest that no more than 10% of U.S. public company boards have a committee dedicated solely to corporate responsibility or sustainability.” An interview with Jill Ker Conway, Chair of Nike’s committee, shows what it would take – and why it so seldom happens.

As Phil Knight its former CEO put it, Nike was once synonymous with “slave wages, forced overtime, and arbitrary abuse.” But in 2001, he endorsed Conway’s suggestion for a board committee to oversee social responsibility, and asked Conway to serve as chair. “She accepted on the condition that Knight attend every meeting—her way of making sure that the committee would not be marginalized.”

It needs to be said that Conway is a very impressive person who grew up under harsh conditions in the Australian outback and rose through academic ranks in the U.S. to become president of Smith College, (stories she chronicled in her The Road to Coorain and True North.) She knows how to fight, and clearly was not going to settle for a symbolic role. With that determination, she got the CEO to agree.

But getting the CEO to attend meetings was just the beginning of recruiting the committee members she needed to be effective. She concluded, rightly, that since the inevitable arguments against sustainability and increased responsibility were based on cost, she needed the CFO on board. She also needed members of her committee steeped in innovation to find creative ways around obstacles. Essentially she had to get the entire company behind the effort, willing to engage such thorny issues as dealing with suppliers dispersed throughout the globe, with factories in third world countries where safety standards are lax and easily subverted.

HBR tells us how truly difficult and unique the depth of the challenge that Conway took on with Nike: “corporate responsibility issues are consistently ranked at the bottom of some two dozen possible board priorities.”

In an interview attached to the article, though, she reveals a critical aspect of her success. In response to the question did she think the company’s “ownership structure” had any bearing on how the company took up the issue, she responded: “I’m absolutely certain it has had an effect.”

“When . . . I trekked around the world trying to recruit other consumer products companies with the same kinds of supply chains to join us. The only ones that had any interest were those with significant family ownership. I don’t think executives of a typical public corporation have that same feeling of moral responsibility that the principal founder or owner has.” (See, “Sustainability in the Boardroom.”)

So when she got Nike’s founder Phil Knight to agree to her terms, she had won half the battle. To be sure, she had to carefully engage the rest of the company to make it work, and as the HBR piece makes clear that was not a piece of cake.

But that finding also makes clear how entrenched and inevitable the opposition will be in corporations. Profit and “shareholder value” are the dominant preoccupations among boards. It’s how they measure performance.

It takes something like a family’s preoccupation with its legacy to counterbalance that mindset.