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There are currently about 7 billion people on Earth and by the middle of this century the number will most likely be between 9 and 10 billion. A greater proportion of these people will in real terms be wealthier than they are today and will demand a varied diet requiring greater resources in its production. Increasing demand for food will coincide with supply-side pressures: greater competition for water, land, and energy, and the accelerating effects of climate change.
Comis Experience has two locations, the iconic Divisidero St. shop just off Haight St. site of many famed signings by creators from Neil Gaiman to Warren Ellis and an early adapter of the grahpic novel movement; and a newer more superhero focused store on Ocean Ave. that Hibbs took over from a previous business last year. Hibbs has long been one of the most vocal comics retailers. His Tilting at Windmills column at CBR is must reading and the comics review blog he started Savage Critics is, unbelievably, still running after 10 years or so. I’m grateful for him to take the time to talk about issues that are sure to become more and more pressing around the country.
THE BEAT: In the Beat comments and a few other places you’ve gotten a lot of free advice on running a store in the Bay Area. Did you expect that when you announced this plan?
HIBBS: After seeing what happened to Alan Beatts of Borderlands Books after he told his story earlier this year, in the public comments sections of Facebook or mainstream news stories — people accusing him of being a monster or much worse — I was expecting a lot more advice from people without all of the facts! Welcome to the internet!
The thing is that these are flashpoint issues for a lot of people, with political under-currents that can’t really be ignored, and I totally get that, but I’m most interested in keeping my store moving into the future, and doing the best I possibly can by my wonderful staff.
THE BEAT: Just to make it as clear as possible when talking about something as personal as what people make for a living, the current minimum wage in California is $9 an hour. I believe you mentioned this in your own comment, but can you confirm that you currently pay your employees more than that? As I understand your comment, you would still have to raise wages in compliance with the new SF minimum wage hike?
HIBBS: Federal MW is $7.25, California is $9, San Francisco is (today this second) $11.05, and moves it to $12.25 in May (not July like I stupidly wrote in the original pitch), then to $13 on 7/1/16, $14 on 7/1/17 and $15 on 7/1/18.
I think it is also important for people to understand that San Francisco’s MW does not STOP at $15/hour after that — San Francisco has an older law that sets annual increases to the amount that the Consumer Price Index (tracked by the Federal government) in the Greater Bay Area rises. Historically, this is 2-3% a year. Therefore in 2019 it might be $15.45, $15.91 in 2020, $16.39 in 2021, and so on
But, anyway, at this second in time we’re obligated to pay $11.05/hour MW in San Francisco. However, we don’t pay MW, except for an initial three month training period. I have no employee currently that is making less than $11.25.
The thing is, as MW rises, so do we need to raise our pay — I’ve spent twenty-six years being a not-MW job (well, twenty-five, because I worked seven days a week in year one), and I don’t want to begin now. When MW is raised by $1.20/hour in May, I believe that means that the people I pay $11.25 today will need to make no less than $12.45 at that point, because, otherwise, are we not effectively CUTTING their pay? In the same way, I have to pay my managers more so that there’s, y’know, a financial benefit for being a manager, and they’re not making the same as “just” staff — and I can’t raise it less than the amount MW is raising by, otherwise, again, they’re effectively getting a cut.
Comix Experience Outpost on Ocean Ave.
THE BEAT: Doing back of the envelope math, $80K comes to $220 a day, which is a pretty hefty added expense for any small business. That would equal selling 55 periodical comics a day more, to put it in perspective. Were there any other methods besides a book club that you considered to make up the shortfall?
HIBBS: Fifty-five $3.99 comics, but more like seventy-four that cost $2.99. And I can’t change those cover prices — we’d lose more customers than we would gain in revenue!
For people asking about the math, it works like this: I have roughly 190 employee hours each week between the two stores. We’re open 10 hours a day at each of the two stores, seven days a week, so you can see that’s really not a tremendous overlap of hours to get all of the labor done that simply can’t be done with only one person in the store who is expected to be, y’know, helping customers find the things they want (or discover things they don’t know they want yet!)
The difference between today’s MW and 2018 is $3.95 /hour. $3.95 times 190 hours times fifty-two weeks a year equals just over $39,000 then we have to add about another $3,000 for the matching taxes that all employers pay for Social Security and Medicare, so that’s $42,000 more that staff will cost. (not counting the new-this-year California mandated minimum Sick Days, either!)
However, in order to make forty-two thousand dollars, this means I have to sell roughly eighty-four thousand dollars worth of merchandise because the Cost of Goods Sold is (very roughly) half of the income — no one is keeping $3.99 from a $3.99 comic book!
I rounded down for ease of communication, but I probably just as easily could have rounded up to $90k because of the various overhead costs that have to be dealt with (shipping, primarily, but there are always other marginal costs that begin to add up quick)
But, yeah, $80k+ is a big hill to climb for a small business.
I do have a few other ways I can help close the gap — I can certainly reduce the number of hours the stores operates for one, though it would help less than you might think because, often, the stores are slowest in the MIDDLE of the day. Further, the great Jim Hanley told me something that always stuck in my mind: you should be open for the customers who are there, not the ones who are not. There are absolutely days that your biggest sale of the day comes at 10:05 AM or 7:55 PM, and you can’t be certain if that sale would still be there if your hours weren’t convenient for the customer.
Comics Experience on Divisidero St.
So, yeah, I could reduce hours of operation, or I could cut staff overlap to be even tighter (though, it’s hard to see how the physical work of the store doesn’t start to slip some in that case), to work that much harder for the pay. I have that choice. There’s not a lot of other places that expenses can be cut, though — we run extremely lean on inventory, and we’ve got robust mechanisms for getting rid of excess stock that work pretty well; and we always do as much cost-pruning as we can for ongoing expenses — just as a dumb example: we’ve used high efficiency light bulbs for years. Hell, I have DSL in the store, rather than cable so that I can save the ~$60/month that entails. No, staffing the stores is, in fact, the single biggest expense each month, higher than rent and every utility and service combined.
And, while I would fire people if that’s what it absolutely positively took to keep the doors open, it is my fervent belief that bookstores that try to cheap their way out of cash-flow problems almost always enter the death-spiral at that point because customers can smell the stench of failure.
What I’d really much rather do, any day of the week, is grow the business enough to pay for this new mandate.
THE BEAT: People in the comments seem to think that owning a smallish comics shop, let alone two smallish comics shops, in the Bay Area with its insane cost of living rise in recent years is a doomed enterprise. How worried are you about the general prognosis for a small business in Google/Apple City, USA?
HIBBS: Don’t forget Twitter and Airbnb and Uber and Yelp too! Plus, The City gives tech firms millions of dollars of tax breaks, and basically pays nothing but lip service to small businesses.
Look: the comic shop that sold (I’ve been told) the largest number of periodical comics in San Francisco, Jeffrey’s Toys on Market street, just a few blocks from all of those tech offices downtown, was just forced out by their landlord who demanded that their rent raised from eight thousand dollars a month to forty thousand! A five-fold increase!
Who on earth can pay forty grand a month each and every month for retail space? A super-high-end restaurant like a Gary Danko or something…. maybe? San Francisco is littered with empty retail store fronts right now because commercial rents have gone nuts, and everyone is trying to get their piece. Just this month two different businesses (Michael’s Pit Stop, a bodega and keymaker, and the KK Cafe, which was a great little cafe where this wonderful couple, Jack and Margret, also made their own peanut milk) within a block of us have been kicked out of their space due to unbearable rent increases.
It is something I worry about each and every day. The main store has been month-to-month for twenty-one years now, my landlord has always refused my offers of a new lease, but they’ve also always been extremely generous about how they handle rent increases. I might have had a crisis long before now except for that. But I could be kicked out at any time with essentially no warning, or have my rent tripled, or whatever, and there’s no recourse.
Look: when I opened in 1989, we had twenty-four comic stores in town, and now we are down to just eight. Two of which are mine. I don’t like that.
Hell, we are probably the only major United States city that doesn’t have a single national-chain bookstore because the economics of bookselling are really hard in a city this expensive.
More generally, though, I do think that the climate for small business in San Francisco, especially small business based around art or creativity, is rough and getting rougher. I certainly expect that between rising rents and this new minimum wage mandate, business like mine which are currently profitable, but only by so much, are going to continue to be pressured over the next few years as the costs associated rise. All we can do is try to plan ahead for the things we can know about, which is really why I am trying to do the Graphic Novel Club.
I really think there’s a value and a need in a curated graphic novel program, because I really and truly think that there are a lot of people who would adore the output of the market…. if only they were aware of all of the choices they have. Comics rule pop culture, but there’s no one really saying “Here, civilian, here is a thing you should read each month”.
I have to think that almost everyone reading this could think of at least one friend or relative who might enjoy the program, and I super encourage folks to spread the word.
Are we “doomed” though? Well, hell no — I could always go back to just having one store and firing most of the staff and running it myself five days a week again; and given that fallback, it’s difficult for me to see almost any outside force making the store close. But, Heidi, that would be such a step backwards, and I’m trying with bold optimism, to move things forward.
The interior of the Divisidero St. store
THE BEAT: Are there any other steps you are taking to deal with the rising cost of living in the Bay Area?
HIBBS: Well, all you can do is try to diversify your store and your customer base and try to appeal to as many people as broadly as possible to help spread the words that comics are awesome. We’re now holding regular ladies nights to try to attract new women to the store (We had one on Ocean last night, and our next one on Divisadero is May 6th), and we’ve started a regular series of weekly videos for the new store to communicate their energy. We want for the original store to do a slightly more cerebral video series at some point — but, whew, only so many hours in the day to shoot and edit such things.
We’re about to start experimenting with doing children’s weekend mornings, with drawing classes and such, too — but ideas are easy; it’s execution and manpower and pulling off community and events without spending too much to implement the ideas that is the trick. Give me an infinite budget, and I bet I could do some amazing things — but the problem isthat budget (and the amount of hours available to DO promotion) and that it is always a limited thing that has to be worked in and around the normal day-to-day servicing of customers and keeping the store running, physically.
THE BEAT: As also mentioned in the comments, the theory behind the wage hike is a form of “trickle down” economics. Do you think it could eventually raise your customer base in some way?
HIBBS: Yeah, well, I have to say, living in a city where we’ve had raising minimum wage every year for the last eleven (well, wait, it didn’t raise in 2010, it looks like), I can not say that I can detect any kind of a correlation between a rising MW and rising revenue. Now, whether that is a result of cost-of-living rising faster than wages, or a result of something particular and specific about the relationship that comics fans and their buying habits share, or whether it is something that I am doing right or wrong, or whether it just has to do with the fact that human beings are messy, illogical beings that operate differently than “well, that sounds like a reasonable theory” would otherwise suggest, I just can’t say. But I am just not seeing any correlation in my sales.
Let me say, kind of as forthrightly as I possibly can, I am not an economist. I don’t actually understand a lot of the theorycraft behind it (though I try), but I do have 26 years as a business owner in a “realpolitik” way of watching my individual micro-economy, and I really think that any kind of “trickle down” is pretty much hooey for a business like mine. People, by and large, determine their budget for comics pretty independently of their specific income. I know plenty of plenty of people who are already spending above their means, and plenty who could pay five times more, but are super-picky, and every case study in-between.
Further, if I understand the various studies that I’ve read correctly, and I absolutely may not be, most studies are reporting on the macro, not the micro — they don’t give a shit about an individual person or entity as long as the overall picture shows a particular result. That’s reasonable of course, but my major concern is for for my staff and my store. I don’t want to be on the wrong side of that ledger. I don’t want to have to fire people, therefore making their new minimum wage zero dollars per hour!
If I understand the studies I’ve read, and, again, I really may not have understood them well at all, they generally show a “neutral” or “slightly improved” impact of small (25 to 50 cent per hour) MW changes. But within any survey there of course will be winners and losers from any kind of economic shift — it’s great that the economy as a whole is “neutral”, but that doesn’t help you if your own personal economy is “laid off” or “have to shut your business”.
Further, it is my understanding (again again again maybe totally wrong) that no credible economist can accurately predict what a raise in MW of this scale will do, because there’s absolutely no evidence since there’s never been a raise on this scale. It is going up 43% over three years, by $3.95 — that is literally unprecedented.
What I think is going to happen is either that more workers will become MW workers, or will get closer to being MW workers, because I have a hard time seeing every San Francisco based business giving each and every employee a $3.95 raise over the next three years, and / or common everyday transactions are going to have to go up as a result. You’ll pay fifty cents more for your coffee and a buck more for your burrito, and you’ll wonder why you seem to have no more money in your pocket at the end of the day.
One of my main frustrations with the law is that it is so arbitrarily, geographically. My minimum wage is going to be $15, but travel just a few minutes south to Daly City and it is only $11; even Marin to our north, which is historically filled with “rich people”, only maxes at $13. Within an half-hour drive, it is only $9.
But the real disconnect, for me, is that what is a “living wage”, and just how much individuals should be able to participate in decisions about their own compensation, and what that entails.
I think it is important to understand that raw dollars-per-hour is not necessarily the only calculation that people make for employment — sometimes people are looking more for respect and agency, while other times people have income needs wholly outside the notion of having to support themselves or their families.
I have staff who live at home and are full-time students; I have staff who are fully supported by their significant other, and who work because they want to generate some pocket money while they work on their art careers. I have staff who purposefully quit better paying corporate jobs to work for me because they have more agency here. And I have staff (Pretty much each and every one of them, really!) who are awesome enough to probably make two or three or five times what I am paying them, but who would rather be here than the many other choices that they have.
Ultimately, I try to be about empowerment — one of my staff specifically told me during the job interview that her goal is to open her own comic book shop someday. Hell yeahs! I am so down with that notion — because certainly one of my proudest days ever was when Michael Drivas learned just enough from me to help him open Big Brain Comics in Minneapolis – but isn’t, I dunno, “learning at the feet of the master” (ew, bad metaphor!!!) worth some sort of credit against hourly wage? Man, I charge my consultancy clients $100/hour for what I say. I mean, I clearly believe that I owe her for her time, duh, but shouldn’t we calculate “value” past only dollars-per-hour?
My bottom line is that I absolutely want to pay people every penny that they are worth, but the hard realities of profit-and-loss sometimes make that harder for others — whether that you’re in a high-expense city, or a low-expense town, I’ve met exceedingly few comic store owners that don’t struggle every day to take care of business.
The more important thing to me is how you deal with that struggle, and I’m trying to find a path that allows my staff to get paid more while making sure that I don’t contract the business so that five of them lose their jobs as a result.
Hibbs in his native habitat (photo from the SF Chronicle by Lacy Atkins)
THE BEAT: Do you foresee the wage hike affecting other shops in the area?
HIBBS: So, my two physically closest competitors are “family operated”, and I don’t believe employ anyone who is getting paid any kind of “hourly wages”. Which is 100% fine, but that means they have a smaller “nut” than I do to breaking even. Three of the other four stores in town have at least one employee, and so will be impacted to at least that degree. No one else in San Francisco, at least as far as I know, has six employees and the payroll that I face, but I do know at least one other store who has a plan to deal with their own shortfall that I assume they will be announcing soon.
Other geek-friendly shops in the area, book stores, game stores, to the extent that they have employees, will have to come up with extra funds to take care of those costs.
I don’t know exactly how clearly other stores are looking at their own liabilities. Until I wrote Alan Beatts I hadn’t actually bothered to take out the pen and actually figure out what the bottom line impact was. Then I crapped my pants when I realized the scope of it.
Thankfully necessity is the mother of invention, because I think I have solid, entrepreneurial plan.
THE BEAT: Finally, how is the book club doing so far? Any surprises or new wrinkles in the huge amount of time (two days) it’s been live?
HIBBS: We’re closing on 72 hours since I first put it live (but I don’t think anyone noticed for most of the first day) and we’re allllmost at the 25%-funded mark, which I think is an absolutely fantastic response, even though that still gives us miles yet to go. I’m also strongly hoping that we can beat the goal by really large percentage so that all of my staff can get paid well above the $15 hour MW as they properly deserve.
My hope of your readership is, even if they don’t think this is for them, is that they’ll think of someone they know who it might be a good fit for, and they’ll make a point of turning their friends on to the idea — from my point of view right now where we’re at, a share is as good as a subscription. We’re fully set up to handle nationwide subs, and the social media connections we have planned, as well as the streaming and recorded book club meetings will be, we hope, the icing on an already fantastic cake of content. If you know anyone who could use a sherpa to guide them through the mountains of comics being published today, I think the Graphic Novel Club is for them.
Corporate diversity dialogues are ripe for backlash, the research shows, even without coffee counter gimmicks.
Corporate executives and university presidents are, yet again, calling for public discussion on race and racial inequality. Revelations about the tech industry’s diversity problem have company officials convening panels on workplace barriers, and, at the University of Oklahoma spokespeople and students are organizing town-hall sessions in response to a fraternity’s racist chant.
The most provocative of the efforts was Starbucks’ failed Race Together program. In March, the company announced that it would ask baristas to initiate dialogues with customers about America’s most vexing dilemma. Although public outcry shut down those conversations before they even got to “Hello,” Starbucks said it would nonetheless carry on Race Together with forums and special USA Today discussion guides. As someone who has done sociological research on diversity initiatives for the past 15 years, I was intrigued.
For a moment, let’s take this seriously
What would conversations about race have looked like if they played out as Starbucks imagined, given the social science of race? Can companies, in Starbucks’ CEO Howard Schultz’s words, “create a more empathetic and inclusive society—one conversation at a time”? A data-driven autopsy of Starbucks’ ambitions is in order.
Surprisingly, Starbucks turned its sights on the provocative issue of racial inequality—not just feel-good cultural differences (or, thank goodness, the sort of “respectability politics” that, under well-intentioned cover, focus on the moral flaws of black people). Most Americans, especially those of us who are white, are ill-informed on the topic of inequality. We generally do not recognize our personal prejudice. We routinely, and incorrectly, insist that we are colorblind and that racism is a thing of the past, as sociologist Eduardo Bonilla-Silva has documented. When we do try to talk about race, we usually resort to what sociologists Joyce Bell and Doug Hartmann call the “happy talk” of diversity, without a language for discussing who comes out ahead and who gets pushed behind.
Starbucks pulls back the veil on our unconscious
How to take this on? Starbucks opted to tackle the thorny issue of unacknowledged prejudice—the cognitive biases that predispose a person against racial minorities and in favor of white people. The company intended to offer “insight into the divisive role unconscious bias plays in our society and the role empathy can play to bridge those divides.” The conversation guide it distributed the first week described a bias experiment in which lawyers were asked to assess an error-ridden memo. When told that the (fictional) author was white, the lawyers commented “has potential.” When told he was black, they remarked “can’t believe he went to NYU.”
Perhaps this was a promising starting point. Americans prefer psychological explanations; we like to think that terrorism, poverty, obesity, and other social ills are rooted in the individual’s psyche.
A comforting thought: I’m not racist
We also do not want to see ourselves as complicit in the segregation of our communities, workplaces, or friendships. We definitely don’t want the stigma of being “racist.” Even white supremacists resist that label. So if it’s true that we can’t see our own bias, as Starbucks told us, we can take comfort in our innocence.
Starbucks’ description of the bias experiment actually took the conversation where it never seems to venture: to the advantages that white people enjoy. White people get help, forgiveness, and the inside track far more often than do people of color. But Starbucks stopped before pointing the finger at who gives white people these advantages.
The rest of Race Together veered off in a confused direction, mostly bent on educated enlightenment. The conversation guide was a mishmash of racial utopianism (the millennials have it figured out!), demography as destiny (immigration changes everything!), triumph over a troublesome past (progress!), testimonies by people of color (the one white guy is clueless!), statistics, inspired introspection, and social network tallies (“I have ____ friends of a different race”!).
Not your daddy’s diversity training
Companies have been trying to positively address race for decades. Typically, they do so through diversity management within their own workforce. Their stated purpose is to increase the numbers of people of color in the top ranks or improve the corporate culture. Most diversity management strategies, however, are far from effective (unless they make someone responsible for results), as shown by as sociologists Alexandra Kalev, Frank Dobbin, and Erin Kelly. Corporate aggrandizement and the façade of legal compliance seem as much the goals as actual change.
Race Together most closely resembled diversity training, which tries to undo managerial stereotyping through educational exchange, but this time the exchange was between capitalists and consumers. And it bucked the typical managerial spin. Usually, the kicker is the business case for diversity: this will boost productivity and profits. Instead, Starbucks made the diversity case for business. Consumption, supposedly, would create inclusion and equity. That would be its own reward. There was no clear connection to its specific business goals, beyond (disgruntled) buzz about the brand.
What were you thinking, Howard Schultz?
Briefly, let’s revisit what made Starbucks’ over-the-counter conversations so offensive. Starbucks was asking low-wage, young, disproportionately minority workers to prompt meaningful exchanges about race with uncaffeinated, mostly white and affluent customers. Even under the best of circumstances, diversity dialogues tend to put the burden of explaining racism on people of color. Here, baristas were supposed to walk the third rail during the morning rush hour without specialized training, much less extra compensation. One sociological term for this is Arlie Hochschild‘s “emotional labor.” The employee was required to tactfully manage customers’ feelings. The most likely reaction from coffee drinkers? Microaggressions of avoidance, denial, and eye-rolling.
The alternative, for Starbucks so-called “partners,” was disgruntled defiance. At my local Starbucks, when I asked about these conversations, the manager emphatically said, “We’re not participating.” The barista next to her was blunt: “We think it’s bullshit.”
Swiftly, the company came out with public statements that had the air of faux intention and cover-up, as if to say, “We’re not retreating; we’re merely advancing in the other direction.” Starbucks had promised a year of Race Together, but the collapse of the café stunt made an all-out retreat more likely: one more forum, one more ad, then silence.
This doesn’t work…
Race Together trod treacherous ground. The research shows that diversity training backfires when it attempts to ferret out prejudice. It puts white people on the defensive and creates a backlash against people of color. For committed consumers, Starbucks was messing with the equivocally best part about capitalism: that you can give someone money and they give you a thing. For activists, this all smelled wrong (i.e., not how you want your latté). Like co-opted social justice.
… Does anyone in HQ ever ask what works?
Starbucks was wise to shift closer to the traditional role of a coffee house—the so-called Third Place between work and home that Schultz has long exalted. Hopefully, the company looks to proven models for productive conversations on race. Organizations such as the Center for Racial Justice Innovation push forward discussions that recognize racism as systemic, not as isolated individual attitudes and bad behaviors. This helps to avoid what people hate most about diversity trainings: forced discourse about superficial differences (“are you a daytime or nighttime person?”) and the wretched hunt for guilty bad guys.
According to social psychologists, unconscious bias can be minimized when people have positive incentives for interpersonal, cross-racial relationships. Wearing a sports jersey for the same team is impressively effective for getting white people to cooperate with African Americans, as shown in a study led by psychologist Jason Nier. The idea is to not provoke white people’s fear and avoidance of doing wrong. It is to motivate people to try to do what’s right by establishing a shared identity
Starbucks also needs to wrestle with its goal of “together.” That’s not always the outcome of conversations about race. Political scientist Katherine Cramer Walsh found that participants in civic dialogues on race commonly walk away with a heightened awareness of their differences, not with the unity that meeting organizers hope to foster.
Is it better to abandon ship?
Despite its missteps, Starbucks, in fact, alit on hopeful insights. Individuals can ignite change, and empathy and listening are starting points. The company deserves some applause for taking the risk and for its deliberate focus on inequality. Undoubtedly, working-class, minority millennials could teach the rest of the country something about race (and executives something about company policy).
The truth hurts
But let’s be clear about what Race Together was not. It was not about addressing institutional discrimination. In that scenario, Starbucks would have issued a press release about eliminating patterns of unfair hiring and firing. It would have overhauled a corporate division of labor that channels racial minorities into lower-tier, nonunionized jobs. It might very well have closed stores in gentrifying neighborhoods.
Those solutions start with incisive diagnosis, not personal reflection. (The U.S. Department of Justice did just that when it scrutinized racial profiling in traffic stops and court fines in Ferguson, Missouri.) Those solutions require change in corporate policy.
To make Race Together honest, Starbucks needed to recognize an ugly truth: America’s race problem is not an inability to talk. It is a failure to rectify the unfair disadvantages hoisted on people of color and the unearned privileges that white people enjoy. Corporations, in their internal operations, are complicit in these very dynamics. So, too, are long-standing government policies, such as tax deductions of home mortgage interest (white folks are far more likely to own their homes). And white Americans may not want to hear it, but racial inequality is, in large measure, rooted in our collective choices: where we’ll pay property taxes, who we’ll tell about a job lead, what we’ll deem criminal, and even when we’ll smile or scowl. Howard Schultz, are you listening?
*This piece was originally published at the Society Pages, http://www.thesocietypages.org
What is Corporate Social Responsibility (CSR) all about? Companies appear to be adopting new attitudes and activities in the way they identify, evaluate and respond to social expectations. Society is no longer treated as a ‘given’, but as critical to business success. In some cases this is simply for the license to operate that social acceptability grants. In others, companies believe that favorable evaluations by consumers, employees and investors (who are, after all, members of society) will improve business performance.
As we approach the annual St Patrick’s Day celebration, the story of the Irish economy in the last five years is worthy of reflection. In late 2010, the Irish Government, following in the footsteps of Greece, was forced to request a deeply humiliating emergency financial bailout from the International Monetary Fund (IMF) and the European Union (EU). Against the background of the recent controversy over the latest “Greek crisis”, what can be said about Ireland’s experience? Here are five relevant issues
Differences in regulatory norms are increasingly seen as the key barriers to the growth of regional and global markets, and regulatory disputes make up some of the most contentious issues in world politics. Negotiations among the most developed economies of the world about regulatory synchronization have made little progress in the last decade, and nearly all harmonization attempts failed when they had involved economies at lower levels of development.
The industrialized world is currently moving through a period of ultra-low interest rates. The main benchmark interest rates of central banks in the United States, the United Kingdom, Japan, and the euro-zone are all 0.50% or less. The US rate has been near zero since December 2008; the Japanese rate has been at or below 0.50% since 1995. Then there are the central banks that have gone negative: the benchmark rates in Denmark, Sweden, and Switzerland are all below zero. Other short-term interest rates are similarly at rock-bottom levels, or below.
Migrant farmworkers plant and pick most of the fruits and vegetables that you eat. Seasonal crop farmers, who employ workers only a few weeks of the year, rely on workers who migrate from one job to another. However, farmers’ ability to rely on migrants to fill their seasonal labor needs is in danger. From 1989 through 1988, roughly half of all seasonal crop farmworkers migrated: traveled at least 75 miles for a U.S. job. Since then, the share of workers who migrate has dropped by more than in half, hitting 18% in 2012.
A news release on 6 February 2015 from the Federal Reserve Board, together with a selection of dense numerical tables, showed once again that consumer credit in use has increased over the course of a year. This is the fourth year in a row and the 67th yearly increase in the 69 years since 1945. But does this mean that credit growth is a meaningful worry? Total consumer sector income and total assets have also increased in 67 of the 69 years since World War II.
Cocoa and chocolate have a long history in Central America but a relatively short history in the rest of the world. For thousands of years tribes and empires in Central America produced cocoa and consumed drinks based on it. It was only when the Spanish arrived in those regions that the rest of the world learned about it. Initially, cocoa production stayed in the original production regions, but with the local population decimated by war and imported diseases, slave labor was imported from Africa.
The ‘First Great Chocolate Boom’ occurred at the end of the 19th and early 20th century. The industrial revolution turned chocolate from a drink to a solid food full of energy and raised incomes of the poor. As a result, chocolate consumption increased rapidly in Europe and North America.
As the popularity of chocolate grew, production spread across the world to satisfy increasing demand. Interestingly, cocoa only arrived in West Africa in the early 20th century. But by the 1960s West Africa dominated global cocoa production, and in particular Ghana and Ivory Coast have become the world’s leading cocoa producers and exporters.
Not surprisingly, given the growth in trade of cocoa and consumption of chocolate, governments have intervened in the markets through various types of regulations. The early regulations (in the 16th–19th centuries) focused mostly on extracting revenue from cocoa production and trade through, for example, taxes on cocoa trade and the sales of monopoly rights for chocolate production.
The world is currently experiencing a ‘Second Great Chocolate Boom.’
More recent regulations have focused mostly on quality and safety. With growing demand for chocolate in the 19th century, chocolate producers substituted cocoa with cheaper raw materials, going from various starchy products and fats to poisonous ingredients. Scientific inventions of the 18th and 19th centuries allowed better testing of the chocolate ingredients. Public outrage against the use of unhealthy ingredients (now scientifically proven), led to a series of safety regulations on which specific ingredients were not allowed in chocolate – and in countries such as France and Belgium also in a legal definition of ‘chocolate’.
Chocolate consumption has many fascinating aspects. It is bought both for the pleasure of consumption and as a gift. It has been considered a healthy food, a sinful indulgence, an aphrodisiac, and the cause of obesity.
For much of history, chocolate (or cocoa drinks more generally) was praised for its positive effects on health and nutrition (and other benefits for the human body). As people were poor, hungry, and short of energy, chocolate drinks and later chocolate bars became an important additional source of nutrition.
In recent years, chocolate consumption is often associated with negative health issues, such as obesity. Recent research has shown that its health potential is closely linked to the composition of the final product and, not surprisingly, to the quantity consumed: darker, lower-fat, and lower-sugar varieties, consumed in a balanced diet are more likely to be healthy than the opposite consumption pattern.
In today’s high income societies where hunger is an exception, food is cheap, and obesity is on the rise, systematic overconsumption of chocolate – often associated with impulsive consumption and lack of self-control – is more associated with health problems. New research in behavioral engineering is targeted to help consumers deal with situational influences, and change behavior in a sustainable way, i.e. by ‘nudging’ them to change their consumption behavior and resisting the lure of chocolate.
One of the intriguing aspects of chocolate is its ‘quality’. Different from many other foods (such as cheese or wine) perceived chocolate quality is not related to the location where the raw material is grown or produced, but to the chocolate manufacturing process and location.
Some countries, such as Switzerland and Belgium are associated with prestigious traditions of chocolate manufacturing. However, perceptions do not always fit reality. ‘Belgian chocolates’, such as pralines and truffles, are now world famous but until 1960, Belgium imported more chocolate than it exported. Since then its “Belgian chocolates” have conquered the world – while the world has taken over the Belgian chocolate (companies). Most “Belgian chocolates” are now owned by international holdings – and a sizeable amount is produced outside the country.
Moreover, consumer perceptions of ‘quality’ are strongly influenced by consumer experiences with their local chocolate – this includes the smoothness of Swiss chocolate from long conching, the milkiness of British chocolate, and the preference of American consumers for chocolate that Europeans consider inferior.
In fact, the integration of the UK, Ireland and Denmark into the (precursor of the) European Union, which included France and Belgium in 1973 resulted in a ‘Chocolate War’ which lasted for 30 years. Disputes between the old and the new member states of the definition of “Chocolate” (and its ingredients) made that British chocolate was banned from much of the EU continent for three decades.
Ethical concerns about chocolate have been triggered by the specific structure of the structure of the global cocoa-chocolate value chain. For most of the past century, the value chain was characterized by a South-to-North orientation, with most of the raw material (cocoa beans) produced in developing countries (‘the South’) and most chocolate manufacturing and consumption in the richer countries (‘the North’). Another characteristic is that cocoa production in the South is almost exclusively by smallholders, while cocoa grinding and (first stage) chocolate manufacturing processes are often dominated by very large companies.
The cocoa-chocolate value chain has undergone significant transformations in recent years. First, in the 1960s through the 1980s the cocoa production and marketing in developing countries was strongly state regulated, often dominated by (para-)statal companies and state regulated prices and trade, etc. In recent years there has been substantial liberalizations of these sectors and the market plays a much larger role in price setting and trading, often resulting in new hybrid forms of ‘public-private governance’ of the world’s cocoa farmers.
Second, these new regulatory systems are reinforced by consumer awareness around labour conditions and low incomes in African smallholder production related to structural imbalances in the value chain. Consumer concerns and civil society campaigns around poor socio-economic conditions of producers (such as child labor) have affected companies’ strategies and responses. These involved (a) sustainability initiatives with civil society and governments, (b) certification initiatives including Fairtrade, Rainforest Alliance and Utz, and (c) various forms of Corporate Social Responsibility (CSR) activities.
The world is currently experiencing a ‘Second Great Chocolate Boom’. Rapidly growing demand is now not coming from ‘the North’, but from rapidly growing developing and emerging countries, including China, India and also Africa. The unprecedented growth of the past decades, the associated urbanization, and the huge size of their economies have turned China and India into major growth markets for chocolate. While consumption is highest in China, and the growth is strong, the country with – by far – the highest growth rates in chocolate consumption is India. In addition, significant African growth of the past 15 years is now also translating into growing chocolate consumption on the continent where most of the cocoa beans are produced.
Headline image: Fresh Cacao from São Tomé & Príncipe, by Everjean. CC-BY-2.0 via Flickr.
Last month, the European Central Bank (ECB) announced its plans to commence a €60 billion (nearly $70 billion) of quantitative easing (QE) through September 2016. In doing so, it is following in the footsteps of American, British, and Japanese central banks all of which have undertaken QE in recent years. Given the ECB’s actions, now is a good time to review quantitative easing. What is it? Why has the ECB decided to adopt this policy now? And what are the likely consequences for Europe and the wider world?
What is quantitative easing (QE)?
Under normal circumstances, central banks undertake monetary policy via open market operations. This typically involves buying (or selling) securities in a short-term money market to lower (or raise) the interest rate prevailing in that market. Central banks are well equipped to do this. They have large inventories of securities that they can easily sell in order withdraw money from the market and push interest rate up. They also have a monopoly on the creation of their particular currency, which they can use to buy securities and push the interest rate down. Open market purchases and sales usually only last for a day or two (through repurchase agreements, or repos), but can be repeated as often as necessary and adjusted in size to achieve the targeted rate.
For an economy that is mired in recession, open market purchases can be a good policy move: buying securities lowers short-term interest rates and increases the money supply. In time, such expansionary monetary policy can also reduce longer-term interest rates, which may stimulate spending on new houses, factories, and equipment, since such investment spending is often made with borrowed money. Expansionary monetary policy will also lead to a decline in the value of the domestic currency on international markets (i.e., depreciation), which will help domestic exports. Too much sustained monetary expansion can lead to inflation, which is one of the main risks of this policy.
In the current economic climate, however, short-term interest rates are already hovering around zero. Although some central banks have flirted with the idea of negative interest rates, there is not much room for conventional expansionary monetary policy to do much good.
Enter quantitative easing. Using quantitative easing, central banks purchase longer-term securities and, unlike open market operations, the purchases are usually permanent instead of for just a few days. This lowers longer-term interest rates. Since individuals and firms that borrow money to invest in homes, factories, and equipment generally do not finance these long-loved assets with overnight borrowing (for mortgages, 15- and 30-year terms are more typical), lowering longer-term interest rates may be a good way to stimulate such long-term investment.
The European economy is listless. GDP appears to have grown—just barely—during the year just finished. Although 2014’s performance was an improvement over 2013’s decline in GDP, the EU’s growth forecasts for 2015 and 2016 are far from rosy. The job market is sluggish: EU-wide unemployment was 11.6% in 2014, down slightly from 12.0% in 2013. And a pick-up in inflation, which should accompany growth, was absent in 2014: the authorities have set a 2.0% for inflation; instead prices rose by an anemic 0.4% in 2014. Several countries have made progress toward much-needed structural reform; however, it is not clear that such reforms alone will get the European economy out of the doldrums anytime soon.
Other dangers facing the European economy also argue in favor of quantitative easing. To the east, tensions with Russia could flare at any time. The terrorist attacks in France have given a boost to right-wing parties throughout Europe, another threat to stability. And the election victory of the anti-austerity Syriza party in Greece, suggests that relations between Greece and the EU are about to get rockier.
What are the consequences?
Quantitative easing will strengthen Europe’s wobbly recovery. The announcement quickly lifted European stock markets—the Euro Stoxx 50-share index rose 1.6% on the news. Lower longer-term interest rates should encourage more borrowing and investment spending. And QE will lead to a continued depreciation in the value of the euro, already at a decade-low against the US dollar, which will make European exports more competitive in world markets. The results will not be so pleasant for American exports, since the euro’s depreciation will cut into recent American export growth, which has benefitted from three rounds of American QE, the last of which ended a few months ago.
Quantitative easing will not sit well with all Euro-zone countries. Germany, which is economically far more robust than its European partners, is not a fan of QE. Memories of a destructive hyperinflation in the 1920s still linger in the national consciousness, lead Germans to be far more skeptical of a potentially inflationary policy that they see as bailing out their more profligate neighbors at their expense.
Finally, the European Central Bank has not said exactly which bonds it will buy. When the US Federal Reserve undertook QE, it had a wide variety of Treasury securities to purchase. Given the high credit-worthiness of the US government and the fact that the market for US Treasury securities is the most liquid market in the world, it was not difficult to find suitable securities to purchase. Will the ECB buy the debt of the fiscally weak euro-zone nations and put their balance sheet at risk? Or will it restrict its purchases to only the most credit worthy countries and risk the ire of the citizens from less well-heeled nations?
Despite these legitimate concerns, Europe’s weak economic performance requires bold action. Quantitative easing is an important step in the right direction.
Featured image credit: Growing Euros, by Images_of_money. CC-BY-2.0 via Flickr.
There’s a puzzle around economics. On the one hand, economists have the most policy influence of any group of social scientists. In the United States, for example, economics is the only social science that controls a major branch of government policy (through the Federal Reserve), or has an office in the White House (the Council of Economic Advisers). And though they don’t rank up there with lawyers, economists make a fairly strong showing among prime ministers and presidents, as well.
But as any economist will tell you, that doesn’t mean that policymakers commonly take their advice. There are lots of areas where economists broadly agree, but policymakers don’t seem to care. Economists have wide consensus on the need for carbon taxes, but that doesn’t make them an easier political sell. And on topics where there’s a wider range of economic opinions, like over minimum wages, it seems that every politician can find an economist to tell her exactly what she wants to hear.
So if policymakers don’t take economists’ advice, do they actually matter in public policy? Here, it’s useful to distinguish between two different types of influence: direct and indirect.
Direct influence is what we usually think of when we consider how experts might affect policy. A political leader turns to a prominent academic to help him craft new legislation. A president asks economic advisers which of two policy options is preferable. Or, in the case where the expert is herself the decisionmaker, she draws on her own deep knowledge to inform political choices.
This happens, but to a limited extent. Though politicians may listen to economists’ recommendations, their decisions are dominated by political concerns. They pay particular attention to advice that agrees with what they already want to do, and the rise of think tanks has made it even easier to find experts who support a preexisting position.
Research on experts suggests that direct advisory effects are more likely to occur under two conditions. The first is when a policy decision has already been defined as more technical than political—that experts are the appropriate group to be deciding. So we leave it to specialists to determine what inventions can be patented, or which drugs are safe for consumers, or (with occasional exceptions) how best to count the population. In countries with independent central banks, economists often control monetary policy in this way.
Experts can also have direct effects when possible solutions to a problem have not yet been defined. This can happen in crisis situations: think of policymakers desperately casting about for answers during the peak of the financial crisis. Or it can take place early in the policy process: consider economists being brought in at the beginning of an administration to inject new ideas into health care reform.
But though economists have some direct influence, their greatest policy effects may take place through less direct routes—by helping policymakers to think about the world in new ways.
For example, economists help create new forms of measurement and decision-making tools that change public debate. GDP is perhaps the most obvious of these. A hundred years ago, while politicians talked about economic issues, they did not talk about “the economy.” “The economy,” that focal point of so much of today’s chatter, only emerged when national income and product accounts were created in the mid-20th century. GDP changes have political, as well as economic, effects. There were military implications when China’s GDP overtook Japan’s; no doubt the political environment will change more when it surpasses the United States.
Less visible economic tools also shape political debate. When policymakers require cost-benefit analysis of new regulation, conversations change because the costs of regulation become much more visible, while unquantifiable effects may get lost in the debate. Indicators like GDP and methods like cost-benefit analysis are not solely the product of economists, but economists have been central in developing them and encouraging their use.
The spread of technical devices, though, is not the only way economics changes how we think about policy. The spread of an economic style of reasoning has been equally important.
Philosopher Ian Hacking has argued that the emergence of a statistical style of reasoning first made it possible to say that the population of New York on 1 January 1820 was 100,000. Similarly, an economic style of reasoning—a sort of Econ 101-thinking organized around basic concepts like incentives, efficiency, and opportunity costs—has changed the way policymakers think.
While economists might wish economic reasoning were more visible in government, over the past fifty years it has in fact become much more widespread. Organizations like the US Congressional Budget Office (and its equivalents elsewhere) are now formally responsible for quantifying policy tradeoffs. Less formally, other disciplines that train policymakers now include some element of economics. This includes master’s programs in public policy, organized loosely around microeconomics, and law, in which law and economics is an important subfield. These curricular developments have exposed more policymakers to basic economic reasoning.
The policy effects of an economic style of reasoning are harder to pinpoint than, for example, whether policymakers adopted an economist’s tax policy recommendation. But in the last few decades, new policy areas have been reconceptualized in economic terms. As a result, we now see education as an investment in human capital, science as a source of productivity-increasing technological innovations, and the environment as a collection of ecosystem services. This subtle shift in orientation has implications for what policies we consider, as well as our perception of their ultimate goals.
In the end, then, there is no puzzle. Economists do matter in public policy, even though policymakers, in fact, often ignore their advice. If we are interested in understanding how, though, we should pay attention to more than whether politicians take economists’ recommendations—we must also consider how their intellectual tools shape the very ways that policymakers, and all of us, think.
From time to time, we try to give you a glimpse into work in our offices around the globe, so we are excited to bring you an interview with Ellen Carey, Senior Marketing Executive for Social Sciences books. Ellen started working at Oxford University Press in February 2013 in Law Marketing, before moving to the Academic Marketing team.
What publication do you read regularly to stay up to date on industry news?
I work on the Social Sciences lists, which includes Business, Politics, and Economics, and lots of the books I work on are very relevant to current affairs. I tend to read the top news stories in The Economist, Financial Times, BBC News website, The Guardian, and The Times every morning. This especially helps with commissioning newsworthy blog posts and writing tweets for the @OUPEconomics Twitter feed. I’ve always been interested in current affairs, and this is something I really enjoy.
What is the most important lesson you learned during your first year in the job?
That everyone makes mistakes and there’s usually a way to fix them, and lots of people are willing to help. Though we obviously try to get things right the first time round!
What is your typical day like at OUP?
My day starts with a huge cup of coffee and a catch up with the team. My day is divided between author correspondence, marketing plans, events and conferences, project work, and social media.
What is the strangest thing currently on your desk?
I have a promotional penguin toy from an insurance law firm – his name is André 3000 – which was given to me by one of my friends who works for a law firm.
What will you be doing once you’ve completed this Q&A?
This afternoon I’ll be working on the Politics catalogue for 2015.
If you could trade places with any one person for a week, who would it be and why?
It would be a prima ballerina in the Royal Ballet – that would be the dream!
How would you sum up your job in three words?
Busy, challenging, diverse.
I love cats! I have a really old, grumpy, 17-year-old cat called Paddy, and my friends and I regularly send Snapchat updates of our cats. I like to be kept in the know with what’s going on in Pickles’ and Mag’s lives.
What is the most exciting project you have been a part of while working at OUP?
The Economics social media group. It’s been really exciting to be part of the team that set up and launched the Economics Twitter feed, and it was great to see us reach 1,000 followers in six months. I’ve also really enjoyed working with colleagues to commission blog posts and we’re looking forward to increasing our social media activities.
What is your favourite word?
Pandemonium. My Mum read me the Mr Men and Little Miss books when I was little, and I always remember this line from Mr Tickle because she’d put on a funny voice: “There was a terrible pandemonium.”
In central Africa, the World Food Program is shifting from aid in kind to cash and vouchers in the refugee camps that it runs. The hope is to create benefits for the surrounding host-country economies as well as for the refugees, themselves.
In West Gonja, Ghana, the UN Food and Agricultural Organization is investing in cassava processing and marketing, in the hope of stimulating incomes, employment, and welfare in one of the country’s poorest regions.
In a small-scale fishery in the Philippines, the government hopes to introduce new regulations to ensure the fishery’s long-term sustainability. The long-term gains are clear, but in the short run, nobody knows what limiting access will mean for an economy in which most fisher households are poor, and income from fishing is vital to these as well as other poor households with whom they interact.
These are classic situations in which local economy-wide impact evaluation (LEWIE) methods can be incredibly useful. These methods model the way local economies function, and can be used to simulate how these economies might behave under shifting conditions. In cases such as those mentioned above, impacts depend critically on how local economies adjust. For example, if local supply responses around refugee camps or in the cassava-producing communities of West Gonja are low, policies that simulate demand could raise prices and harm people they intend to benefit, with collateral damage on other linked sectors and household groups.
For those designing or evaluating a policy or program, LEWIE methods can highlight impacts not only on those directly affected by the intervention, but also the spillover impacts around them. Policy makers and donors want to know what sorts of complementary interventions might be needed in order to make sure that their programs are successful. Often, answers are needed before programs and policies are put into place. LEWIE methods were designed to provide such answers. The stakes are high, and as always, time and resources are limited.
We find that LEWIE often has impacts far beyond what we anticipate when we begin an evaluation. Often, it reveals benefits missed by other approaches. Documenting likely impacts beyond those affected directly by an intervention ex-ante can tip the cost-benefit scale in favor of funding the intervention. More and more, governments and donors want to know that a development project not only benefits targeted households and sectors but also creates positive economic spillovers—and they want to know what can be done to enhance those spillovers. Documenting impacts beyond the treated can be critical in order to garner political and institutional support for projects and policies.
Here’s a recent example: Our LEWIE of LEAP, Ghana’s flagship social cash-transfer program, found that each cedi transferred to a poor household increases local income by as many as 2.5 cedi. (A summary of this evaluation can be found at the UN-FAO’s From Protection to Production website.
Ghana’s President John Dramani Mahama, opening the Pan-African Conference on Inequalities last April, stated: “LEAP has had a positive impact on local economic growth. Beneficiaries spend about 80 percent of their income on the local economy. Every GH1 transferred to a beneficiary has the potential of increasing the local economy by GH2.50.” His goal was clear: to demonstrate that social protection and economic growth can be complements. It appears that LEAP accomplishes both. Read the President’s speech.
Understanding LEWIE is basic to designing rigorous and innovative RCTs. Development projects are likely to create spillovers within treated localities as well as with neighboring ones. LEWIE gives us a way of thinking about these spillovers so that RCTs capture them and avoid control-group contamination and other problems that often raise questions about the validity of experimental results.
Most practitioners and policy makers do not construct LEWIE models or carry out RCTs, but they often find themselves involved in designing interventions and coming up with strategies to evaluate their impacts. Insights from LEWIE studies, which have been carried out for a wide variety of interventions in diverse contexts, can inform their work, at a time when more and more donors include “local economy impacts” in their list of evaluation criteria. LEWIE changes the way we think about impacts, direct or indirect, on people who are so vulnerable that we cannot risk being wrong.
Headline image credit: Highway Fruit Stall, by flöschen. CC BY-NC-SA 2.0 via Flickr
The Great Recession of 2008–09 badly shook the global market, changing the landscape for finance, trade, and economic growth in some important respects and imposing tremendous costs on average citizens throughout the world. The legacies of the crisis—high unemployment levels, massive excess capacities, low investment and high debt levels, increased income and wealth inequality—reduced the standard of living of millions of people. There is an emerging consensus that global economic governance, as well as national policies, needs to be reformed to better reflect the economic interests and welfare of citizens.
Global recovery is sluggish and the outlook uncertain. The economies of the Eurozone, which may have fallen into a “persistent stagnation trap,” and Japan remain highly vulnerable to deflation and another bout of recession; in the advanced economies that are growing, recovery remains uneven and fragile. Growth in emerging and developing economies is slowing, as a result of tighter global financial conditions, slow growth of world trade, and lower commodity prices. Because consumption and business investment have been tepid in many countries, the gradual global recovery has been too weak to create enough jobs. Official worldwide unemployment climbed to more than 200 million people in 2013, including nearly 75 million people aged 15–24.
Professor Roubini, one of the few economists who predicted the 2008 crisis, has argued that the global economy is like a four-engine jetliner that is operating with only one functioning engine, the “Anglosphere.” The plane can remain in the air, but it needs all four engines (the Anglosphere, the Eurozone, Japan, and emerging economies) to take off and stay clear of storms. He predicts serious challenges, including from rising debt and income inequality.
Relatively slow growth in the advanced economies and potential new barriers to trade over the medium term have significant adverse implications for growth and poverty reduction in many developing countries. Emerging economies, including China and India, that thrived in recent decades in part by engaging extensively in the international economy are at risk of finding lower demand for their output and greater volatility in international financial flows and investments. A combination of weaker domestic currencies against the US dollar and falling commodity prices could adversely affect the private sector in emerging economies that have large dollar-denominated liabilities.
Rising inequality is holding back consumption growth. The ratio of wealth to income, as well as the income shares of the top 1% of income earners, has risen sharply in Europe and the United States since 1980, as Professor Piketty has shown.
The ratio of the share of income earned by the top 10% to the share of income earned by the bottom 90% rose in a majority of OECD countries since 2008, a key factor behind the sluggish growth of their household consumption. During the first three years of the current recovery (2009–12), incomes of the bottom 90% of income earners actually fell in the United States: the top 10%, who tend to have much lower propensity to consume than average earners, captured all the income gains. In developing countries for which data were available for 2006–12, the increase in the income or consumption of the bottom 40% exceeded the country average in 58 of 86 countries, but in 18 countries, including some of the poorest economies, the income or consumption of the bottom 40% actually declined, according to a report by the World Bank and IMF.
Some signs of possible relief may lie ahead. In September 2014, leaders at the G20 summit in Brisbane agreed on measures to increase investment infrastructure, spur international trade and improve competition, boost employment, and adopt country-specific macroeconomic policies to encourage inclusive economic growth. If fully implemented, the measures could add 2.1% to global GDP (more than $2 trillion) by 2018 and create millions of jobs, according to IMF and OECD analysis. (These estimates need to be treated with caution, as the measures that underpin them and their potential impact are uncertain, and the nature and strength of the policy commitments vary considerably across individual country growth strategies.)
Another potential sign of hope is the sharp decline in the prices of energy, a reflection of both weaker global demand and increased supply (particularly of shale oil and gas from the United States). The more than $40 a barrel decline in Brent crude prices is likely to raise consumers’ purchasing power in oil-importing countries in the OECD area and elsewhere and spur growth, albeit at considerable cost (and destabilizing effects) for the more populous and poorer oil exporters. It could also be a harbinger of energy price spikes down the road, as the massive investments needed to ensure adequate supplies of energy may not be forthcoming as a result of their unprofitability at low prices.
Major global challenges have wide-ranging long-term implications for the average citizen. By 2030, the world’s population is projected to reach 8.3 billion people, two-thirds of whom will live in urban areas. Massive changes in the patterns of energy and resource (particularly water) use will be needed to accommodate this 1.3 billion person increase—and the elevation of 2–3 billion people to the middle class.
A citizen-centered policy agenda would need to reform national economies to spur growth and job creation, placing greater reliance on national and regional markets and the sustainable use of resources; emphasize social policies and the economic health of the lower and middle classes; invest in human capital and increase access to clean water, sanitation and quality social services, including a stronger foundation during the early years of life and support for aging with dignity and equity; improve labor market flexibility to employ young people productively; and enhance human rights and the freedom of people to move, internally and internationally. These policies would need to be complemented by policies that use collective action to mitigate risks to the global economy.
To prevent another global crisis, there is an urgent need to strengthen global economic governance, including through global trade agreements that favor the bottom half of income distribution; reform of the international monetary system, including the functioning and governance structure of the international financial institutions; encouragement of inclusive finance; and institution of policies to discourage asset bubbles. To achieve sustainable growth, all countries need to remove fossil fuels and other harmful subsidies and begin pricing carbon and other environmental externalities.
Worldwide surveys show that citizens everywhere are becoming more aware and active in seeking changes in the global norms and rules that could make the global system and the global economy fairer and less environmentally harmful. This sense is highest among the young and better-educated, suggesting that over time it will increase, potentially leading to equitable results for all citizens through better national and international policies.
Headline image: World Map – Abstract Acrylic, by Free Grunge Textures. CC-BY-2.0 via Flickr.
Atif Mian and Amir Sufi’s House of Debt, a polemic about the Great Recession and a call to action about the borrowing and lending practices that led us down the fiscal pits, already made a splash on the shortlist for the Financial Times‘s Best Business Book of 2014. Now, over at the Independent, the book tops another Best of 2014 list, this time proclaimed, “the jewel of 2014.” From Ben Chu’s review, which also heralds another university press title—HUP’s blockbuster Capital by Thomas Piketty (“the asteroid”):
As with Capital, House of Debt rests on some first-rate empirical research. Using micro data from America, the professors show that the localities where the accumulation of debt by households was the most rapid were also the areas that cut back on spending most drastically when the bubble burst. Mian and Sufi argue that policymakers across the developed world have had the wrong focus over the past half decade. Instead of seeking to restore growth by encouraging bust banks to lend, they should have been writing down household debts. If the professors are correct—and the evidence they assemble is powerful indeed—this work will take its place in the canon of literary economic breakthroughs.
We’ve blogged about the book previously here and here, and no doubt it will appear on more “Best of” lists for business and economics—it’s a read with teeth and legs, and the ostensible advice it offers to ensure we avoid future crises, points its fingers at criminal lending practices, greedy sub-prime investments, and our failure to share—financially and conceptually—risk-taking in our monetary practices.
For this American, my favorite holiday has always been Thanksgiving. Why? I have an image in my mind of Native Americans and colonists meeting and sharing food together; they share knowledge and stories. In the midst of their concerns about each other, they found respect for each other. Their spirit of sharing is a great inspiration.
As an economist in this upside-down world of people stressing over their future and present, I find answers in that image of Thanksgiving. People eventually survive by sharing with each other as a community. The poor are fed. The sick are cared for. The struggling are helped, and communal ties are strengthened.
There is a term in economics, social capital. This term refers to the cultural interactions within a society forming cohesion, coordination, and cooperation that allow an economy to function better. An economy relies on people from diverse backgrounds talking, sharing concerns, negotiating, making plans, and working toward common goals. The social quality of their communication determines the true strength and potential of their economy.
When the Native Americans and the colonists met and shared, I see social capital being built. The society became stronger. People would be better able to have their needs met. There would be less conflict and more enjoyment of work. The societuy would be able to grow in potential.
The focus of my research as an economist is in the area of labor share, which is the percentage of the income from production that is shared with labor. I research how changes in labor share affect such things as potential production, employment, productivity, investment, and even monetary policy from a central bank.
In almost all advanced countries, even in China where labor share was already low, labor share has fallen in an exorbitant way since the turn of the century. What has been the effect of labor receiving less share of a national income? Potential output has fallen. Unemployment will be higher than before. Productivity growth will stall much quicker, or even fall as in the United Kingdom. Nominal interest rates from central banks will be stuck near 0%.
The fall in labor share represents a problem in the social capital of advanced countries. Labor is being excluded from economic development. Their concerns are not being heard, while corporate profits extend to new records. Labor’s wages are expected to fall in order for companies to be more competitive globally.
Stop. Take a moment of silence.
Acknowledge the growing problem of inequality, and return now to celebrate this holiday of Thanksgiving. Within this day exists the answers to our economic concerns. As societies, we only need to share more. And in sharing, we show our respect for the value of people within society.
A man can’t get rich if he takes proper care of his family.
The Navajo, or Diné, have a saying: “A man can’t get rich if he takes proper care of his family.” The wisdom embodied in this saying is immense. The wisdom not only assures the strength of each member of the community by building social capital, but it assures a stronger economy.
Now we need to answer the question: Who is family?
Here comes the true meaning of Thanksgiving: We are all family. The poor, the rich, the uneducated, the educated, the powerful, and the powerless, as well as those of different races and cultures. Families, friends, and strangers are invited into our homes to celebrate Thanksgiving. The abundance is shared and ties of respect are celebrated.
The extent to which a society can see everyone within the society as family determines the potential of their economy and eventually the quality of life. So Thanksgiving is a moment to celebrate how different people can embrace each other in a spirit of sharing. In that sharing, a broader vision of family is cultivated. In that vision, sick economies can be healed.
Featured image ‘Home to Thanksgiving’ litohraph by Currier and Ives (1867). Public domain via Wikimedia Commons
Jose Nuñez lives in a homeless shelter in Queens with his wife and two children. He remembers arriving at the shelter: ‘It’s literally like you are walking into prison. The kids have to take their shoes off, you have to remove your belt, you have to go through a metal detector. Even the kids do. We are not going into a prison, I don’t need to be stripped and searched. I’m with my family. I’m just trying to find a home’.
Maryann Broxton, a lone mother of two, finds life exhausting and made worse by ‘the consensus that, as a poor person, it is perfectly acceptable to be finger printed, photographed and drug-tested to prove that I am worthy of food. Hunger is not a crime. The parental guilt is punishment enough.’
Palma McLaughlin, a victim of domestic violence, notes that ‘now she is poor, she is stigmatised’; no longer ‘judged by her skills and accomplishments but by what she doesn’t have’.
People in poverty feel ashamed because they cannot afford to live up to social expectations. Being a good parent means feeding your children; being a good relative means exchanging gifts at celebrations. Friendships need to be sustained by buying a round of drinks or returning money that has been borrowed. When you cannot afford to do these things, your sense of shame is magnified by others. Friends, even close relatives, avoid you. Your children despise you, asking, for example: ‘why was I born into this family?’. Society similarly accuses you of being lazy, abusing drugs or promiscuity, assumed guilty until proved innocent. You can even be blamed for the ills of your country, the high levels of crime or its relative economic decline. The middle class in Uganda ask: ‘how can Uganda be poor when the soils are rich and the climate is good if it’s not the fault of subsistence farmers’?’
In the US, as in Britain, it may be welfare expenditure that is blamed for stifling productive investment.
Shame is debilitating as well as painful. People avoid it by attempting to keep up appearances, pretending everything is fine. In so doing, they often live in fear of being found out and risk overextending finances and incurring bad debts. People in poverty typically avoid social situations where they risk being exposed to shame; in so doing lose the contacts that might help them out when times get particularly harsh. Sometimes shame drives people into clinical depression, to substance abuse and even to suicide. Shame saps self-esteem, erodes social capital and diminishes personal efficacy raising the possibility that it serves also to perpetuate poverty by reducing individuals’ ability to help themselves.
Shame also divides society. While the stigma attaching to policies can be unintentional, sometimes the result of underfunding and staff working under pressure, the public rhetoric of deserving and undeserving exacerbates misunderstanding between rich and poor, nurturing the presumption that the latter are invariably inadequate or dishonest. Often around the world, stigmatising welfare recipients is deliberate and frequently supported by popular opinion. Blaming and shaming are commonly thought to be effective ways of policing access to welfare benefits and regulating anti-social and self-destructive behaviour. However, such beliefs are based on two assumptions that are untenable. The first is that poverty is overwhelmingly of people’s own making, the result of individual inadequacy. This can hardly be the case in Uganda, Pakistan or India. Nor is so elsewhere. Poverty is for the most part structural, caused by factors beyond individual control relating to the workings of the economy, the mix of factors of production and the outcome of primary and secondary resource allocation. The second assumption is that shaming people changes their behaviour enabling them to lift themselves out of poverty. However, the scientific evidence overwhelmingly demonstrates that shaming does not facilitate behavioural change but merely imposes further pain.
Jose, Maryann and Palma were not participants in a research project. Rather they are members of ATD Fourth World, an organisation devoted to giving people in poverty voice, and their testimonials are available to read online. Echoing Martin Luther King, Palma dreams that one day her four children will be judged not by the money in their bank accounts but by the quality of their character.
Headline image credit: ‘Someone Special to Someone, Sometime’ by John W. Iwanski. CC BY-NC 2.0 via Flickr.
While food insecurity in America is by no means a new problem, it has been made worse by the Great Recession. And, despite the end of the Great Recession, food insecurity rates remain high. Currently, about 49 million people in the U.S. are living in food insecure households. In a recently-released article in Applied Economics Policy and Perspectives my co-authors, Elaine Waxman and Emily Engelhard, and I provide an overview of Map the Meal Gap, a tool that is used to establish food insecurity rates at the local level for Feeding America (the umbrella organization for food banks in the United States).
For 35 years, Feeding America has responded to the hunger crisis in America by providing food to people in need through a nationwide network of food banks. Today, Feeding America is the nation’s largest domestic hunger-relief organization—a powerful and efficient network of 200 food banks across the country. You can learn more about food insecurity rates in America by listening to the below podcast:
What are the state-level determinants of food insecurity? What is the distribution of food insecurity across counties in the United States? How do the county-level food insecurity estimates generated in Map the Meal Gap compare with other sources? Along with reviewing Map the Meal Gap and finding out the answers to these questions, we discuss ways that policies can and are being used to reduce food insecurity in the United States.
Headline image credit: Supermarket trolleys, by Rd. Vortex. CC-BY-2.0 via Flickr.
For those addicted to politics, newspapers and magazines have long provided abundant, sometimes even insightful coverage. During the last hundred years, print outlets have been supplemented by radio, then television, then 24/7 cable TV news. And with the growth of the internet, consumers of political news now have access to more analysis than ever.
One analytical tool that the politics-following public will not have access to this year is Intrade, an on-line political prediction market. Political prediction markets work very much like financial markets. Investors “buy” a futures contract on a particular candidate; if that candidate wins, the contract pays a set amount (typically $1); if the candidate loses, the contract becomes worthless. The price of candidates’ contracts vary between zero and $1, rising and falling with their political fortunes—and their probability of winning. You can see a graph of Obama and Romney contracts in the months preceding the 2012 election here.
Organized political betting markets have existed in the United States since the early days of the Republic. According to a 2003 paper by Rhode and Strumpf, during the late 19th and early 20th centuries wagering on political outcomes was common and market prices of contracts were often published in newspapers along with those of more conventional financial investments. Rhode and Strumpf note that at the Curb Exchange in New York, the total sum placed on political contracts sometimes exceeded trading in stocks and bonds.
Political betting markets became less popular around 1940. Betting on election outcomes no doubt continued to take place, but it was a much less high-profile affair.
Modern political prediction markets emerged with the establishment in 1988 of the Iowa Electronic Markets (IEM), a not-for-profit small-scale exchange run by the College of Business at the University of Iowa. The IEM was created as a teaching and research tool to both better understand how markets interpret real-world events and to study individual trading behavior in a laboratory setting. The IEM usually offers only a few contracts at any one time and investors are allowed to invest a relatively small amount of money. As of mid-October, the Iowa markets—like the polls more generally—were predicting that the Republicans will gain seats in the House and gain control of the Senate.
An important feature of political prediction markets—like financial markets—is that they are efficient at processing information: the prices generated in those markets are a distillation of the collective wisdom of market participants. A desire to harness the market’s ability to process information led to an abortive attempt by the Defense Advanced Research Projects Agency in 2003 to create the Policy Analysis Market, which would allow individuals to bet on the likelihood of political and military events—including assassinations and terrorist attacks–taking place in the Middle East. The idea was that by processing information from a variety disparate sources, monitoring the prices of various contracts would help the defense establishment identify hot-spots before they became hot. The project was hastily cancelled after Congress and the public expressed outrage that the government was planning to provide the means (and motive) to speculate on—and possibly profit from–terrorism.
Another, longer-lived—and for a time, quite popular–prediction market was Intrade.com. This Dublin-based company was established in 1999. At first, it specialized in sports betting, but soon expanded to include an extensive menu of political markets. During recent elections, Intrade operated prediction markets on the presidential election outcome at the national level, the contest for each state’s electoral votes, individual Senate races, as well as a number of other political races in the US and overseas. Thus, Intrade offered a far variety of betting options than the IEM.
Intrade was forced to close last year when the US Commodities Futures Trading Commission (CFTC) filed suit against it for illegally allowing Americans to trade options (by contract, the IEM secured written opinions in 1992 and 1993 from the CFTC that it would not take action against IEM, because of that market’s non-profit, educational nature). The CFTS’s threat to Intrade’s largest customer base very quickly led to a dramatic drop-off in visitors to the site, which subsequently closed. Alternative off-shore betting markets have entered the political markets (e.g., Betfair), but their offerings pale by comparison with those formerly offered by Intrade and are probably too small at present to spur the CFTC to action.
I regret the loss of Intrade, but not because I used their services—I didn’t. Given the federal government’s generally hostile view toward internet gambling, I felt it was prudent to abstain. Plus, having placed a two-pound wager on a Parliamentary election with a bookmaker when I lived in England many years ago convinced me that an inclination to bet with the heart, rather than the head, makes for an unsuccessful gambler.
No, I miss Intrade because it provided a nice summary of many different political campaigns. Sure, there are plenty of on-line tools today that provide a wide array of expert opinion and sophisticated polling data. Still, as an economist, I enjoyed the application of the mechanisms usually associated with financial markets to politics and observing how political news generated fluctuations in those markets. No other single source today does that for as many political races as Intrade did.
Feature image credit: Stock market board, by Katrina.Tuiliao. CC-BY-2.0 via Wikimedia Commons.
As Nehru was India’s longest serving prime minister, and both triumph as well as tragedy had accompanied his tenure, this is a fit occasion for a public debate on what had been attempted in the Nehru era and the extent of its success. I must per force confine myself to the economics. This, though, serves as a corrective to the tendency of political historians to mostly concentrate on the other aspects of his leadership. For instance, Sarvepalli Gopal’s noted three-volume biography bestows a single chapter on Nehru’s economic policy. However, reading through the speeches of Nehru we would find that the economy had remained his continuing pre-occupation even amidst the debates on social policy in the Lok Sabha or on de-colonisation in the United Nations. Reading these speeches is indeed advisable, as strongly held positions on the economy in the Nehru era have often been crowded in by ideological predilection when they have not been clouded over by ignorance.
The objective of economic policy in the 1950s was to raise per capita income in the country via industrialisation. The vehicle for this was the Nehru-Mahalanobis strategy, the decision to this end having been taken as early as 1938 by the National Planning Committee of the Congress constituted by Subhas Chandra Bose during his all-too-brief and ill-fated presidentship of the Party. The Committee was chaired by Nehru. The cornerstone of the strategy was to build machines as fast as possible as capital goods were seen as a basic input in all lines of production. While a formal model devised by Prasantha Chandra Mahalanobis had lent a formal status to the strategy it was the so-called ‘plan frame’ that had guided the allocation of spending. In retrospect, the allocation of investment across lines of production in the Second Five-Year Plan was quite balanced with substantial attention given also to infrastructure, the building of which, given the state of the economy then, the public sector alone would have initiated.
The Nehru-Mahalanobis strategy had attracted criticism. I discuss two of these criticisms at this stage and turn to the third at a later stage. Thus, Vakil and Brahmananda argued that the Mahalanobis model neglected wage goods, being those consumed by workers who were the majority of the country. While important per se, in practical terms, this criticism, turned out to be somewhat academic, as the plan frame – as opposed to the model – had given due importance to agriculture. In fact, the Green Revolution which is dated from the late 60s cannot entirely be divorced from the attention paid to agriculture in the Nehru era. The Grow More Food campaign and the trials in the country’s extended agricultural research network all contributed to it. Next, B.R. Shenoy had written a note of dissent to the Second Five-Year Plan document which queried the use of controls as part of the planning process. Shenoy’s is a well-known position in economic theory that the allocative efficiency of the competitive market- mechanism cannot be improved upon. While this is a useful corrective to ham-handed government intervention it was known even by the 1950s that a free market need not necessarily take the economy to the next level. The Pax Britannica had been a time of free markets, though coated with political repression, and this had not helped India much during the two centuries since Plassey. Moreover many of the extant controls were war-time controls that had not been rescinded. Investment licensing though was a central element in planning in India and Shenoy was right in identifying it as such.
As the maxim ‘the proof of the pudding lies in the eating’ must apply most closely to matters economic, the Nehru-Mahalanobis strategy can be considered only as good as its outcomes. It had aimed to raise the rate of growth of the economy. With the distance that half a century affords us and the aid of superior statistical methods we are now in the position to state that its early success was nothing short of spectacular. Depending upon your source, per capita income in India had either declined or stagnated during the period 1900-47. Over 1950-65, its growth was approximately 1.7 percent. India’s economy, which was no more than a colonial enclave for more than two centuries had been quickened. It is made out that this quickening of the economy in the fifties was no great shakes as the initial level of income was low and a given increase in it would register a higher rate of growth than at a later stage in the progression. This confounds statistical description with an economic assessment. It is a widely recognised feature of economic growth that every increase in wealth makes the next step that much easier to take due to increasing returns to scale. The principle works both ways, rendering the revival of an economy trapped at a low level of income that much more difficult. It is worth stating in the context that the acceleration of growth achieved in the nineteen fifties has not been exceeded since. Also, that India grew faster than China in the Nehru era.
So if the Nehru-Mahalanobis strategy had led to such a good start, why were the early gains not sustained? The loss of the early vitality in the economy had to do partly with political economy and partly with a flaw in the strategy itself. The death of Nehru created a crisis of leadership in the Congress Party which was transferred to the polity. It took almost a decade and a half for stability to be restored. The consequence was felt in the governance of the public sector, and public investment which had been the engine of growth since the early fifties slowed. Additionally, the private corporate sector, which contrary to conventional wisdom had flourished under Nehru, was initially repressed by Indira Gandhi. Private investment collapsed. This held back the acceleration of economic growth.
Even though we now have reason to believe that the mechanism of long-term growth that remains to this day, which is that of cumulative causation, had been ignited by the Nehru-Mahalanobis strategy, the strategy itself was incomplete. This is best understood by reference to the Asian Development Model as it had played out in the economies of east Asia. These economies had pursued more or less the same strategy as India in that the state fostered industrialization. But a glaring difference marks the Indian experience. This was the absence of a serious effort to build human capabilities via education and training. In the east this had taken the form of a spreading of schooling, vocational training and engineering education. In India on the other hand public spending on education had turned towards technical education at the tertiary level too early on. The slow spread of schooling ensured that the growth of productivity in the farm and the factory remained far too slow. Now the pace of poverty reduction also remained slow, and via positive feedback slowed the expansion of demand needed for faster growth of the economy.
It is intriguing that the issue of schooling did not figure majorly among India’s planners, especially as it was part of Gandhi’s Constructive Programme. This had not gone unnoticed even at that time. B.V. Krishnamurthi, then at Bombay University, had pointed out that the priorities of the Second Five-Year Plan undergirded by the Mahalanobis model were skewed. He castigated it for a bias toward “river-valley projects”, reflected in the paltry sums allocated to education. But it was the argument advanced by him for why spending on schooling matters that was prescient. He argued that education would enable Indians to attend to the question of their livelihood themselves without relying on the government, thus lightening the economic burden of the latter, presumably leaving it to build more capital goods in the long run as envisaged in the Mahalanobis model. But this was not to be, with enormous consequences for not only the economy but also the effectiveness of democracy in India.
While the failure to initiate a programme of building the capabilities of the overwhelming majority of our people is a moral failure of colossal proportions, we would be missing the wood for the trees if we do not recognize the economic significance of the short Nehru era in the long haul of India’s history. A moribund economy had been quickened. This would have been the pre-condition for most changes in a country with unacceptably low levels of per capita income. It is yet to be demonstrated how this could have been achieved in the absence of the economic strategy navigated through a democratic polity by Jawaharlal Nehru.
In 2007, the UK Parliament passed the Legal Services Act (LSA), with the goal of liberalizing the market for legal services in England and Wales and encouraging more competition—in response to the governmentally commissioned ‘Clementi’ report finding the British legal market opaque, inflexible, overly complex, and insulated from innovation and competition.
Among other salient provisions, the LSA authorized the creation of ‘Alternative Business Structures,’ permitting non-lawyers to take managerial, professional, and ownership roles, and explicitly opening the door to law firms raising capital from outside investors and combining with other professional services firms—even listing publicly on a stock exchange. All this has made the UK’s £25-billion/year legal marketplace “one of the most liberalized in the world,” according to the Financial Times.
Our question for today is whether this bracing demolition of guild-like protectionist rules will stop at the English coastline—more specifically, whether it will leap the North Atlantic to the US, the single largest legal marketplace in the world by far, now just north of $250-billion (£150-billion) per year. It would be the irresistible force meeting the immovable object.
Two predictions may be made without fear of contradiction.
First is that the American Bar Association (ABA), with its 400,000 members, will resist any incursions into US lawyers’ monopoly over legal services with every weapon at their disposal short of, perhaps, violence. A core function of the ABA is promulgating the “Model Rules of Professional Conduct,” which have the force of law in 49 states. ABS’s would flatly offend Rule 5.4(a), prohibiting fee-sharing with a non-lawyer, and 5.4(d), prohibiting practicing in any organization where a non-lawyer owns an interest.
We know ABA opposition will be fierce because it happened once before. In 2000, the ABA’s governing House of Delegates entertained a proposal to amend the ethical rules to permit “multidisciplinary practices” (consider them the functional equivalent of the UK’s ABS’s). This went down to “crushing defeat” as the state bars of Illinois, New Jersey, New York, Florida, and Ohio joined in “strident” denunciation of the heresy of fee sharing and vehement “reaffirmation of the core values of the law of lawyering.”
The horrified opposition cited fears of the invasion of the profession by predatory investors prepared to sacrifice clients on the altar of profits. Adam Smith – or for that matter Peter Drucker – might be skeptical of the long-run viability of a business premised on putting its clients last, but be that as it may, I’m reminded of the remark by American Lawyer editor-in-chief Aric Press some years ago that the magazine’s creation of the notorious profits-per-partner scorecard for law firms “did not introduce the profession to greed.”
Lest you believe the world might have moved on in the intervening decade and a half, and that we have learned guilds tend to collapse of their own sclerosis by now, permit me to disabuse you of that hope. Earlier this year the state bar of Texas issued a binding opinion that law firms there may not include the terms “officer” or “principal” in the job title of non-lawyer employees. “Don’t mess with Texas,” indeed.
Finally, note that the states leading the charge here are six of the ten largest in the US, comprising nearly one-third of the country’s total population. Their opposition will not be trifling: They have ground troops.
My second prediction: A barrier which will effectively halt the flow of money and ideas at any essentially arbitrary line—such as a national border—has yet to be invented. If you doubt this, I refer you to the extended and unblemished track record of abject failure in US attempts to control or limit political campaign financing.
If globalization stands for anything, it is the accelerating movement of capital, people, and ideas across jurisdictional borders – movement which, despite hiccups and speed bumps, is becoming steadily more frictionless and irreversible. In the case of Law Land, this would mean a UK-based ABS coming to our shores (and I devoutly hope their beach-head would be little old New York – I want a front-row seat to this brawl) with a checkbook and an appetite for expansion.
The moment the announcement is made, I predict that two inter-related dynamics would begin playing themselves out.
First, managing partners of US-based firms would go through the famous stages of grief: denial, anger, bargaining, depression, and ultimately acceptance. Acceptance here could only translate into a demand for a “level playing field” for their firms. Since, then as now, they presumably will lack the votes in Parliament to repeal the LSA, that would mean adopting a functional equivalent – permitting MDP’s – here in the US. And a level playing field is, after all, a bedrock imperative of fairness. They would be making a nice argument.
Second, someone would sue. It matters not whether it be the ABS suing for permission or an aggrieved US lawyer suing for prohibition; a “real case or controversy” would be presented for adjudication. I’m not going to practice antitrust or constitutional law in these pages, but my strong intuition is that a challenge to the bar prohibitions on non-lawyer involvement would prevail on a combination of antitrust and commerce clause claims (the “commerce clause,” Article I, §8.3 of the US Constitution, prohibits unduly burdensome state interference with interstate commerce, and since at least the era of the New Deal it has been given extraordinarily wide reach).
But the outcome really shouldn’t be determined by tidy legalities. At root, it should come down to a socioeconomic and ethical choice driven by which of these views of the legal profession is on the right side of history.
Do we prefer the cozy walled precincts of the guild, righteously defending its economic rents under the cloak of claims of “the best interest of the client,” “confidentiality,” “privilege,” and so forth? Or do we prefer Schumpeter’s, or Silicon Valley’s, bracing call for “creative destruction,” as messy and fraught with failed experiments as we can be sure it will be?
I certainly know where my heart lies, and it’s with the best interests of the client truly and rightly understood. Unleash the market’s Darwinian selection process.
The construction or recertification of a nuclear power plant often draws considerable attention from activists concerned about safety. However, nuclear powered US Navy (USN) ships routinely dock in the most heavily populated areas without creating any controversy at all. How has the USN managed to maintain such an impressive safety record?
The USN is not alone, many organizations, such as nuclear public utilities, confront the need to maintain perfect reliability or face catastrophe. However, this compelling need to be reliable does not insulate them from the need to innovate and change. Given the high stakes and the risks that changes in one part of an organization’s system will have consequences for others, how can such organizations make better decisions regarding innovation? The experience of the USN is apt here as well.
Given that they have at their core a nuclear reactor, navy submarines are clearly high-risk organizations that need to innovate yet must maintain 100% reliability. Shaped by the disastrous loss of the USS Thresher in 1963 the U.S. Navy (USN) adopted a very cautious approach dominated by safety considerations. In contrast, the Soviet Navy, mindful of its inferior naval position relative to the United States and her allies, adopted a much more aggressive approach focused on pushing the limits of what its submarines could do.
Decision-making in both organizations was complex and very different. It was a complex interaction among individuals confronting a central problem (their opponents’ capabilities) with a wide range of solutions. In addition, the solution was arrived at through a negotiated political process in response to another party that was, ironically, never directly addressed, i.e. the submarines never fought the opponent.
Perhaps ironically, given its government’s reputation for rigidity, it was the Soviet Navy that was far more entrepreneurial and innovative. The Soviets often decided to develop multiple types of different attack submarines – submarines armed with scores of guided missiles to attack U.S. carrier battle groups, referred to as SSGNs, and smaller submarines designed to attack other submarines. In contrast the USN adopted a much more conservative approach, choosing to modify its designs slightly such as by adding vertical launch tubes to its Los Angeles class submarines. It helped the USN that it needed its submarines to mostly do one thing – attack enemy submarines – while the Soviets needed their submarines to both attack submarines and USN carrier groups.
As a result of their innovation, aided by utilizing design bureaus, something that does not exist in the U.S. military-industry complex, the Soviets made great strides in closing the performance gaps with the USN. Their Alfa class submarines were very fast and deep diving. Their final class of submarine before the disintegration of the Soviet Union – the Akula class – was largely a match for the Los Angeles class boats of the USN. However, they did so at a high price.
Soviet submarines suffered from many accidents, including ones involving their nuclear reactor. Both their SSGNs, designed to attack USN carrier groups, as well as their attack submarines, had many problems. After 1963 the Soviets had at least 15 major accidents that resulted in a total loss of the boat or major damage to its nuclear reactor. One submarine, the K429 actually sunk twice. The innovative Alfas, immortalized in The Hunt for Red October, were so trouble-prone that they were all decommissioned in 1990 save for one that had its innovative reactor replaced with a conventional one. In contrast, the USN had no accidents, though one submarine, the USS Scorpion, was lost in 1968 to unknown causes.
Why were the USN submarines so much more reliable? There were four basic reasons. First, the U.S. system allowed for much more open communication among the relevant actors. This allowed for easier mutual adjustment between the complex yet tightly integrated systems. Second, the U.S. system diffused power much more than in the Soviet political system. As a result, the U.S. pursued less radical innovations. Third, in the U.S. system decision makers often worked with more than one group – for example a U.S. admiral not only worked within the Navy, but also interacted with the shipyards and with Congress. Finally, Admiral Rickover was a strong safety advocate who instilled a strong safety culture that has endured to this day.
In short, share information, share power, make sure you know what you are doing and have someone powerful who is an advocate for safety. Like so much in management it sounds like common sense if you explain it well, but in reality it is very hard to do, as the Soviets discovered.
Feature image credit: Submarine, by subadei. CC-BY-2.0 via Flickr.
Dwight D. Eisenhower described leadership as “the art of getting someone else to do something you want done because he wants to do it.” Eisenhower was a successful wartime general and president. What made him successful? It was not a full head of hair and a fit physique, two of the physical traits of a CEO. What made him an unsuccessful university president? Was it luck or skill, or his social interactions with those he led?
There are many theories on what makes a leader effective, where effective leaders go, and whether leaders are born or created, but little empirical work. We cannot run a field experiment to study leadership of an organization in a high-stakes setting. Empirical tests of leadership theories have to come from quantitative studies of leaders and organizations, but large, longitudinal datasets on CEOs and companies are rare. A unique longitudinal data set on Union Army soldiers augmented with information on the regiment level provides a testing ground for leadership theories. This sample (available at uadata.org), created from men’s army records and linked to their census records, is the most comprehensive longitudinal database in economic history. It has been used to study the economics of aging (Costa 1998) and the role that social capital plays in people’s decisions (Costa and Kahn 2008). The data contain information on men’s promotions and demotions, their jobs during the war, their socioeconomic and demographic information at enlistment, and their jobs and locations after the war.
Who became a leader and what made leaders effective? The more able, i.e. the literate and men who were in higher status occupations, were more likely to become officers. So were the tall and the native-born. There were benefits to being an officer – higher pay and lower odds of death, both on and off the battlefield. Game theoretic models of leader effectiveness have emphasized that one way to elicit effort from followers is to lead by example. Although on average commissioned officers did not imperil themselves in battle, when they did, it was an effective strategy in creating a cohesive fighting unit. Company desertion rates were lower for companies in which the regimental battlefield mortality of commissioned officers relative to enlisted men was higher.
After the war leaders moved to where their talent would have the highest pay-off, as predicted by economic models of sorting. The former sergeants and commissioned officers were more likely than privates to move to larger cities which provided higher wages and greater diversity in the dominant economic activity of the time, manufacturing. Even men who started in low status occupations in cities were able to climb the occupational ladder.
Are leaders created or born? The Army, and a large management literature, stresses that leaders have character, presence, and intellectual capacity. In contrast, economic theory emphasizes the management skills that can be learned. Union Army soldiers who missed being promoted because casualty rates were relatively low in their companies were likely to be in a large city after the war compared to men who were promoted, suggesting that in the long-run leaders are created. One of the skills learned in the army may have been to be a generalist. Sergeants and commissioned officers with more than strict military tasks while in the army were more likely to be in large cities.
A Civil War context for testing theories of personnel economics may be unusual. The 150th anniversary of the Civil War has focused more on historical research and re-enactments. But if a stress test of theories is their explanatory ability in very different contexts, academic personnel economics does very well.
Headline image credit: Field Band of 2nd R.I. Infantry. Photo by Mathew Brady. War Department. Office of the Chief Signal Officer. Brady National Photographic Art Gallery. US National Archives and Records Administration. Public domain via Wikimedia Commons.
For investors and asset managers, expected stock returns are the rates of return over a period of time in the future that they require to earn in exchange for holding the stocks today. Expected returns are a central input in their decision process of allocating wealth across stocks, and are essential in determining their welfare. For corporate managers, expected returns on the stocks of their companies, or the costs of equity, are the rates of returns over a period of time in the future that their shareholders require to earn in exchange for injecting equity to their companies today. The costs of equity play a key role in the decision process of corporate managers when deciding which investment projects to take and how to finance the investment. Despite the paramount importance, no consensus exists on how to best estimate expected stock returns. In fact, one of the most important challenges in academic finance is to explain anomalies, empirical patterns of expected stock returns that seem to evade traditional theories.
A manager should optimally keep investing until the investment costs today equal the value of future investment benefits discounted to today’s dollar terms, using her firm’s expected stock return as the discount rate. This economic logic implies that all else equal, stocks of firms with high investment should have lower discount rates than stocks with low investment. Intuitively, low discount rates lead to high discounted values of new projects and high investment. In addition, stocks with high profitability (investment benefits) relative to low investment should have higher discount rates than stocks with low profitability. Intuitively, the high discount rates are necessary to offset the high profitability to induce low discounted values for new projects and low investment.
To implement this idea, we use a standard technique in academic finance that “explains” a stock’s return with the contemporaneous returns on a number of factors. In a highly influential study, Fama and French (1993) specify three factors: the return spread between the overall stock market and the one-month Treasury bill, the return spread between small market cap and big market cap stocks, and the return spread between stocks with high accounting relative to market value of equity and stocks with low accounting relative to market value of equity. Carhart (1997) forms a four-factor model by augmenting the Fama-French model with the return spread between stocks with high prior six to twelve month returns and stocks with low prior six to twelve month returns.
We propose a new four-factor model, dubbed the q-factor model, which includes the market factor, a size factor, an investment factor, and a profitability factor. The market and size (market cap) factors are basically the same as before. The investment factor is the return spread between stocks with low investment and stocks with high investment. The profitability factor is the return spread between stocks with high profitability and stocks with low profitability. The q-factor model captures most of the anomalies that prove challenging for the Fama-French and Carhart models in the data.
Specifically, during the period from January 1972 to December 2012, the investment factor earns an average return of 0.45% per month, and the profitability factor earns 0.58%. The Fama-French and Carhart models cannot capture our factor returns, but the q-factor model can capture the returns on the Fama-French and Carhart factors. More important, the q-factor model outperforms the Fama-French and Carhart models in “explaining” a comprehensive set of 35 significant anomalies in the US stock returns. The average magnitude of the unexplained returns is on average 0.20% per month in the q-factor model, which is lower than 0.55% in the Fama-French model and 0.33% in the Carhart model. The number of unexplained anomalies is 5 in the q-factor model, which is lower than 27 in the Fama-French model and 19 in the Carhart model. The q-factor model’s performance, combined with its economic intuition, suggests that it can serve as a new benchmark for estimating expected stock returns.