Changing Perverse Incentives

The Brookings Institution has released a report that I can only describe as “compelling.” Titled “More Builders and Fewer Traders,” it focuses like a laser on the perverse policy incentives that have contributed to dramatic levels of inequality.

In our new paper “More builders and fewer traders: a growth strategy for the American economy” we identify a handful of obscure but important shifts—in laws, regulations, and standard practices—which, taken together, have changed the incentive structure of leaders in American corporations. This set of incentives has led to short term behavior on the part of corporate leadership. These incentives are so powerful that once they became pervasive in the private sector, they began to have broad effects. No one set out to create this myopic system, which arose piecemeal over a period of decades. But taken together, these perverse new micro-incentives have created a macroeconomic problem.

The report zeros in on four trends that have contributed to what the authors call “short-termism.”  One consequence of these trends is that–while cash distributed to shareholders as a share of cash flow has surged– the share devoted to capital investment has fallen to a record low.

I don’t disagree with the authors’ focus on these trends, the problems they pose for the economy, or their contribution to inequality.  I do wonder, however, how much of the lack of investment in the future of American industry can be traced back to the way we  finance corporations and the separation of ownership from management.

“Ownership” can mean many things, but it is difficult to square our common-sense understanding of ownership with the purchase of a few hundred shares of stock in a major corporation. Such “ownership” carries with it no meaningful control, no right to make decisions, and “risk” only to the extent that there may be a decrease in the value of one’s stock.

The reality is that American corporations borrow money two ways–through the sale of bonds, which are more secure but which carry only a stated rate of return, and the sale of stock, the proceeds of which represent a gamble on the future of the enterprise: more risk, but the chance of a superior “reward.” Let’s be honest: Neither the bondholder nor the small or medium-sized shareholder is an owner in any meaningful sense of the word.

Meanwhile, the people managing these companies are frequently not “owners,” either. They’re hired hands, often with little investment in the business. Their compensation and continued employment depend significantly upon their ability to keep short-term stock prices high, thus they have every incentive to keep workers’ wages down and their own paychecks as high as possible.

None of this fosters the capitalist virtue of pride in the product, or good corporate citizenship (except as a marketing tool), or decision-making that is in the long-term best interests of the enterprise.

When a company is truly owned by an individual or small group, when those owners see their own prospects intimately bound up with the long-term success of the venture, corporate behavior changes. Such owners are certainly focused upon earnings and the bottom line–but they understand what innovations and behaviors will be needed to protect that bottom line into the future. Concern for long-term fiscal health provides incentives to care about their reputation, their workforce, the quality of their products and the health of the communities in which they operate.

When public policies incentivize short-term gains over long-term decision-making, the focus turns from producing goods and services to playing financial games–with broad negative consequences for job creation, wages, economic stability–and ultimately, American competitiveness.

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Respect and Civility

I know it will come as a real shock to those who read this blog, but I have opinions. A point of view. And admittedly, a regrettable tendency toward snark. (A Republican colleague at the University regularly greets me with “Hi, Snarky!)

I know those things about myself. At my age, I should.

Nevertheless, I was taken aback by a recent email from a reader agreeing with a column I’d written for the Indianapolis Business Journal. He informed me that such agreement with me was rare, and chided me for what he perceived to be a lack of respect for those holding contrary positions.

I thought about that accusation, and I decided that he is half right. Although I hope that I “walk the talk” with respect to my frequent calls for greater civility, civility is not respect. It is possible to be perfectly polite–perfectly civil– to someone for whom you have no regard.

So, what about the “respect” allegation?

I do have respect–great respect–for people who clearly share a commitment to important social goals (equal treatment under law, amelioration of injustice, official accountability and the like) but who disagree, sometimes strongly, about way we define those goals, or the policies most likely to achieve them. They are well-intentioned people with a perspective that is contrary to mine–a perspective I try  (not always successfully) to understand.

But it is true that I do not have respect for people who are self-serving and intellectually dishonest, the self-aggrandizing and/or antagonistic types we all come across–the “look at me!” know-it-alls who clearly aren’t interested in leaving the world a bit better than they found it, or making things any easier for those having a hard time. They are the trolls, the race-baiters, the angry name-callers, the people who don’t engage with the specifics of any discussion but seem only to be looking for a fight. My lack of respect for them undoubtedly comes through, because I tend to simply ignore such people. There is no point in feeding animus.

In my own defense, I think respect has to be earned.

Everyone is entitled to be treated civilly. Not everyone is entitled to be respected.

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Policy and Prejudice

How do you distinguish criticism of President Obama based upon policy from that motivated by racism?

There are some telling clues. For example, in a recent Facebook exchange, a commenter weighed in on a post featuring a picture of Obama, accusing the President of “Nixonian” behavior and (ironically) racism.

Let’s deconstruct that.

It is beyond debate that President Obama has encountered massive resistance to even his most uncontroversial initiatives. (There’s a lively debate over whether the enormous and vicious hostility to this President is “one of the worst” or “the worst” in history–not having been around for all of that history, I’ll leave that argument to the historians.)

It is perfectly understandable that Americans would disagree with the priorities or suggested policies of this or any chief executive. (The current opposition to the TPP is a good example.) But it’s also clear that racism drives a great deal of the hostility.

There is a simple test that lets you tell the difference between genuine disagreement and bigotry.

I’ve previously blogged about the woman who complained that, every time she had a principled policy objection to something Obama was doing, she encountered accusations of racism. I commiserated, then asked her which of the President’s policies she objected to. Her response was “He’s a socialist!” When I asked her which policy positions she considered socialist, she raised her voice; “He’s a Muslim!”

Gee–I wonder why people think she’s a racist….

A similar dynamic was obvious in the referenced Facebook exchange. The objections to the President were all what we call “ad hominem” attacks–name calling. Labelling. Not a single concrete example of a wrongheaded policy or a “Nixonian” activity.

I happen to admire President Obama. But even though I think he’s done a remarkably good job under unbelievably difficult circumstances, I can identify policies he’s pursued with which I disagree. (NSA, anyone? Drones?)

So here’s the test: when someone protests that their criticism of POTUS isn’t racist, ask them to specify the policies with which they take issue. If they can’t–if they respond with characterizations and indignation rather than a factual, verifiable example of something the President has actually said or done–then yes, they’re racists.

And boy, there are a lot of them.

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No, Public Officials Aren’t “Ministers of God”

Oh Alabama…Are you trying to out-Texas Texas?

For years, we’ve watched the antics of crazy Judge Roy Moore–he of the 5-ton Ten Commandments fiasco– who somehow managed to get himself re-elected to the Alabama Supreme Court a couple of years ago. (Moore is a poster child for the proposition that Judges ought not be popularly elected.)

In the wake of the Supreme Court’s ruling on same-sex marriage, Moore has (predictably) gone over the edge. Far, far over. So has the lawyer representing him, who is apparently as delusional about the American legal system and the settled meaning of the First Amendment as his client.

In a letter to Alabama’s Governor urging defiance of the Supreme Court’s decision, the lawyer–Win Johnson–wrote:

Public officials are ministers of God assigned the duty of punishing the wicked and protecting the righteous. If the public officials decide to officially approve of the acts of the wicked, they must logically not protect the righteous from the wicked. In fact, they must become protectors of the wicked. You cannot serve two masters; you must pick — God or Satan.

And you know whose side that crafty Satan is on….

I’m not sure what law school Mr. Johnson attended, but the fact that he actually matriculated should be cause for considerable concern.

This isn’t just a misunderstanding of separation of church and state;  it’s civil law as understood by the Taliban.

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Tradition! Tradition!

No, I’m not about to break into a musical rendition from “Fiddler on the Roof.”

Instead, I’m commenting on a recent post from Juanita Jean at The World’s Most Dangerous Beauty Salon, Inc. where the topic was a recent rant by Bill O’Reilly, accusing the White House of “spitting on traditional Americans” by bathing the facade in rainbow lights after the Court ruled in Obergefell.

As Juanita Jean reminds us

Traditional Americans? As opposed to Untraditional Americans? Well, I’ll be damned, against all odds O’Reilly did in fact find another way to divide this country.

Just think, if this country had traditional people running it we would still have child labor,women without the vote, slavery, poll tax, and a helluva lot of muskets.

Exactly.

In that “traditional” America, women couldn’t enter into contracts or get credit without the consent of their fathers or husbands. Birth control was outlawed under “obscenity” statutes. Abortion for any reason was illegal. Women had no protection from sexual harassment in the workplace, and were routinely paid less than men. Gays were in firmly closed closets. Blacks “knew their place.”

It’s the passing of that “traditional” world, and the loss of those “traditional” family values that (old, white, heterosexual) men are bemoaning when they proclaim that they “want their country back.”

The next time Justice Scalia (“Get off my lawn, you whippersnappers!) goes into a tirade about the need to protect even those “traditions” that most of us now consider fundamentally unfair–“traditions” that violate important Constitutional principles of equality and autonomy–let’s think about the many ways those sacred traditions operated to cement the privileges enjoyed by un-self-aware, self-important (white, male) curmudgeons like Bill Riley and Antonin Scalia.

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