Category: Society

The Freedom to Trade

“Since the 1970s, economic orthodoxy has argued for low tariffs, free capital flows, elimination of industrial subsidies, deregulation of labor markets, balanced budgets and low inflation.” That has been the conventional wisdom of mainstream economists, according to Jeff Madrick writing in The New York Times.

The idea is that barriers to trade distort free markets and, in the long run, are counter-productive to economic growth. Not surprisingly, though, as American workers have watched their jobs migrate overseas, they have clamored for protection. Their reaction has been viewed as short sighted by those economists enthralled by free market ideology. Eventually, they have argued, markets will balance out and the “invisible hand” will make sure we all profit.

To be sure, protecting obsolete practices and inefficient industries will slow the “creative destruction” that is the key to a thriving economy under capitalism. It benefits the few at the expense of the many.

But it turns out that, once again, the “laws” of economics don’t always work as expected. Madrick noted: “Even free-trade advocates now admit that American wages have been reduced as a result of outsourcing, the erosion of manufacturing and an ever-increasing reliance on imports.”

Worse, the following day in a comprehensive account of what it called the “great wage slowdown of the 21st century,” The Times noted that the “typical American family makes less than the typical family did 15 years ago.” That kind of decline has not “previously been true since the Great Depression”

Oh! This has little to do with free trade and globalization. The news about the decline in the official unemployment rate last week was accompanied by a sobering report on stagnant wages. So, yes, there may be more jobs than before but they are paying less. The underlying news is that workers are being squeezed, if not one way, then in another.

Madrick went on to note that free trade “has created tremendous prosperity — but mostly for those at the top . . . . Little wonder, then, that Americans, in another Pew survey, last winter, ranked protecting jobs as the second-most-important goal for foreign policy, barely below protecting us from terrorism.”

So it may well be that, on the whole, free trade is a good thing, just as free markets generally are, but that is not the same thing as a law, an inflexible truth that reality compels us to obey.

Not surprisingly, this issue is tied to our rising income inequality. Those who have money have flexibility. Investors can switch out of one kind of asset into another. Money also allows them to switch out of investments altogether for a time if the economic climate is unfavorable to growth. Those who work for a wage have no such freedom. Economists will argue that then they can switch to other jobs. But even if their skills match the jobs available, recent history brings home the fact that there are fewer and fewer jobs to chose from.

So free markets, like free trade, largely benefit the free, those with sufficient resources to chose how to invest and where to work. This uncomfortable truth is masked by the statistics that smooth over the differences and make it seem that we are all equal participants in the global economy.

What is it About? What Does it Do For Us?

The proliferation of celebrities in our culture is relatively recent. In the past, writers and actors sometimes became celebrated, well-known, even famous, but it was seldom something they aspired to. A by-product of exceptional achievement, usually, fame was often awkward for the person thrust into the limelight.

But the media’s voracious appetite for content is, no doubt, the major driver of celebrity culture today. Moreover, celebrity now can be monetized though endorsements and testimonials. It feeds on itself through openings, parties to launch new fragrances and other products, red carpet appearances, fashion shows, TV interviews, etc. And it doesn’t take any particular skill, just a good publicist, determination, and the knack of being in front of the cameras. It’s a career.

So what do they do for us, apart from giving us momentary distractions from the bad news of accidents and disasters, and the lingering problems of unemployment, political gridlock, corruption, war, and terrorism? Well, yes, they do that, providing diversion from constant drumbeat of bad news. Apart from an occasional “wardrobe malfunction,” few really terrible things happen on the red carpet.

But there is more: the endless parade of celebrities in the media gives us a prettified and palatable version of social inequality. The super rich are invisible in their gated communities and penthouses, private planes, limos, exclusive resorts. We know they are there, even if we don’t see them. Celebrities, on the other hand, are over exposed, appearing and reappearing on talk shows, late night TV, society pages, magazines, etc. They have a lock on our attention.

“Americans have no idea just how unequal our society has become,” Paul Krugman wrote recently. “For example, according to Forbes, Robert Downey Jr. is the highest-paid actor in America, making $75 million last year. According to the same publication, in 2013 the top 25 hedge fund managers took home, on average, almost a billion dollars each.” The fact that celebrities absorb so much attention and provoke so much envy, allows our more sedate and private billionaires to escape attention.

And though we may envy the privilege and fame of celebrities, we seldom admire or respect them. On the contrary, we enjoy their foibles and antics. Their affairs and divorces make us feel superior. Their pranks amuse us while often inspiring contempt. And we know, as well, that the shelf life of celebrity is short lived. New celebrities constantly displace the old.

But they do live in a rarefied realm. They are swept to the head of lines in theatres and restaurants, the police protect them, keeping the rest of us at a safe distance. Often, they are involved in politics, donating their services for fund raising, and they give money themselves – but not the tens of millions of dollars the super rich give to Super Pacs. They have publicists but don’t hire lobbyists or meet privately with candidates to influence legislation.

They provide a kind of camouflage for the .01 percent, distracting us from the yawning income divide that continues to widen at our feet.

Is It Fading at Last?

Hedge funds have been cloaked in mystery from the start, starting with the name. “To hedge” means to protect or limit, but in fact the funds have been among the more risky and obscure investment vehicles Wall Street has to offer.

“Hedging” investments was designed originally to protect against loss by counter-investing in alternatives that would rise in value if the original investment declined. Originally, the funds attracted smart and sophisticated managers, as it required considerable savvy to match up such investment pairings. But those managers soon decided that hedging investments was a drag on profits. So the funds discarded their original efforts to hedge their bets, keeping the privacy, exclusivity and mystique of being exceptionally clever.

Capitalizing on their success, they charged a lot: 2% annually of assets, typically, and 20% of profits. Regulators – aware of the increased risk — discouraged ordinary investors from participating, but that seems only to have increased the allure of hedge funds in the eyes of the public and some portfolio managers eager to get into what was, for a time, a very profitable game.

But hedge funds are under no requirement to disclose their trades. Moreover, they often made it hard to cash out. All of that was fine, so long as values went up, but recently they have fallen on hard times, failing to match their past performances. Managers of pension funds have gotten wary, and recently Calpers, the California retirement fund for public employees, decided to divest all hedge fund investments.

That seems like a sensible move, especially as pension funds need to rely on steady income to pay out benefits for retirees. They can’t just wait around for hedge funds to rebound.

Moreover the secrecy clouding hedge funds were increasingly problematic for trustees accountable for investment decisions. One trustee for the Kentucky state pension fund noted recently: “The auditor wasn’t allowed to see the contracts, and the contract review committee for the Legislature was not allowed to look at them, either.” Another retirement system in Tennessee was invested in more than 120 hedge funds, “whose identities, securities holdings, trading costs and custodians are unknown.” Substantial duplication of underlying managers was also found. How did they know what kind of “hedging” – in the original sense of the term — went into the fund at all? Indeed, how did they know that investments in hedge funds were not amplifying risk?

Calpers’ decision to divest came as a shock to the system. No doubt other pension funds will follow suit – and a few investors. But the reaction of Wall Street commentators has been fascinating.

The Times followed up its account by noting that Calpers’ investments in hedge funds was miniscule, and other investors were not likely to follow its example. But in an unusual tone of mockery it commented: “So hedge fund titans, California may just not be that into you, but there are plenty of other starry-eyed, deep-pocketed investors to woo.” Businessweek noted that “the industry’s best period is likely behind it.” But then it gave this parting kick: “No matter how many $100 million Picasso paintings they purchase, hedge fund moguls are not magicians.” And The Wall Street Journal dryly provided evidence that across the board, hedge funds are underperforming the market.

Who knew the extent of the hatred and contempt lurking just below the surface? But whether is springs from resentment over the success of the funds, envy for their performance, or retaliation for their arrogance, the schadenfreude is palpable.

Or the Danger of Being a Professional Expert

Economists are beginning to question their jobs data. They had been focusing on the percentage of workers looking for work, and that news has gotten slightly better. But now they realize that the work force itself has been shrinking. That’s troubling and strange. It also changes their conclusions.

The “labor market economist, the Nobel laureate Peter A. Diamond, has . . . concluded that much of what he and others have written previously is misleading because the unemployment rate is no longer an accurate labor market gauge . . . . The percentage of prime-working-age Americans, those between 25 and 54, who are in the labor force fell to a 30-year low of 80.7 in July.”

Floyd Norris, the chief business reporter for The New York Times noted, somewhat acerbically: “You don’t need to be an economist to know when jobs are easy to get. The members of the Federal Open Market Committee would be better advised to watch the consumer confidence survey than to focus on the unemployment rate.”

But they don’t. Economists like many other professionals are stuck in their models, and they often look to each other before they check out reality. For many years they subscribed to the theory that people’s economic decisions are rational, based entirely on self-interest. Many of them also believed markets were “perfect,” that is they are the only reliable way to get at the true value of commodities. Taken to the extreme, that meant there could be no “bubbles,” no inflated values that are unsustainable, that would inevitably lead to busts or, worse, recessions.

Paul Krugman was scathing in his criticism of his colleagues complacency, their ‘widespread conviction . . . that such a crisis couldn’t happen. Underlying this complacency was the dominance of an idealized vision of capitalism, in which individuals are always rational and markets always function perfectly.”

But to be fair this is a fault with many professionals. They have their standard ways of gauging reality and they tend to form a strong fraternity of immovable convictions. It’s not so much that they are stubborn, as that it never occurs to them that the world operates in ways that deviate from what they, their mentors and colleagues have come to believe.

This true of all of us, to some degree, but it is more of a problem with professionals, those who are trained to use their judgment to navigate complex problems and to help people make decisions where much is at stake. Curiously, esoteric knowledge in specialized fields often goes hand in hand with this kind of intransigence. But why?

One reason is that they are subject to enormous pressure as so much attention is directed to their conclusions. We turn to them, as “experts,” for the truth behind the facts, the meaning of events, and that is a very seductive place to be. Any tendency to be self-important will be amplified by that attention. People in that position come to believe that they really know the truth.

Moreover, their own belief in their expertise is based on the consensus they establish among themselves, the certainty that comes from all subscribing to the same beliefs. That consensus requires courage and extraordinary conviction to challenge, and very few are up to that task. No doubt, Professor Diamond thought long and hard before he advanced his challenge to the conventional model.

But, obviously, we need such thinking outside the box if we are not to go on believing what’s obviously true – and wrong.

The “Human” Resource

If you Google “Why companies don’t hire,” you get a flood of responses — and an interesting sidelight on the disappointing job news.

Prospective employees are “under-qualified,” because, as the Wall Street Journal noted, businesses no longer provide training. But, then, so many are “overqualified.” Other entries suggest companies also don’t want to hire the unemployed, or veterans, those over 40, or “jerks,” defined as those who don’t fit in.

Perhaps the large number of people seeking jobs makes companies choosey. That encourages them to raise standards, include more people in the process, cast wider nets, ask more questions. They delay and dither and, as they do, they generate more doubts: Is the person really committed? Will he get along with co-workers? Is she perhaps too aggressive? What about illness in the family?

But I suspect that this fussiness masks a deep underlying resistance to the very idea of hiring. Employees have accidents, get sick, misbehave, complain, fight, sue, unionize and in general display all the messy attributes of human beings.

The Wall Street Journal recently noted that the time it takes corporations to complete a hire has reached a record 58 working days, and it quotes one senior executive: “When there’s a larger pool out there you can make mistakes and there’s another one standing in the queue.” he says. He sums it up: “when you hire someone you want to make sure they’re the right one.”

But can you ever know for sure? Such hesitation is the very definition of ambivalence, the fear of getting it wrong.

So all the alternatives to hiring employees are being explored. The best, of course, is robots since they always stick to their tasks and can be scrapped or retooled as needed. Close to robots are automated functions like computerized answering systems, ATMs, gas pumps, and the like. Then, part-time workers are better than full-time, as they are easier to hire because they are also easier to fire; they involve less of a commitment. Another strategy is outsourcing work to other companies that carry the risk.

Over-working existing employees is another favorite strategy, adding hours of extra work each week or just cancelling vacations for those who already work for you. Even better is encouraging employees to cancel their vacations or simply forgo them because they are “indispensible.” There is a lot of evidence to suggest that this becoming more and more common: “Vacations in the U.S. are among the shortest in the world, and a quarter of American workers get no paid vacation leave at all,” according to John de Graaf, executive director of Take Back Your Time.)

It is a frightening picture because it suggests that we never get back to the “full employment” we remember and still officially hold as our goal. It also suggests a growing divide between levels of work, the jobs that require creative thinking and those that are routine and repetitive.

The jobs that demand innovative thinking are the ones that depend on messy people, who can’t always stay in the boxes to which they are assigned. But, then, how to decide whose messiness is worth tolerating? The “human” resource in HR is getting harder to find.