Romney increasingly disconnected…

It was everywhere in the news yesterday that Mitt Romney made 14 million in 2011. Doing what was the first question that came to mind as the guy spent his year on the campaign trail. Does Romney have a job??

He must have made that money through his financial investments, plus the carry interests he had from his Bain Capital days (stakes he had in companies that were bought when he was with Bain and sold subsequently), and also probably speaking engagements, book rights, etc. But I wonder how most people will react to that huge number – especially those who think that they are “productive” members of society and have jobs that serve a particular function, which is most of us I think.

And then there is the question of taxes – he paid about 14% of his income in federal taxes. The highest marginal tax rate is 35% and Romney would definitely be in that bracket, having earned 14 million… So, how come he paid only 14%? What deductions did he take? He must be a Math & Tax Wiz - and I am probably an idiot by the way because the effective rate of my income I paid in federal taxes last year was pretty much what my marginal rate was (25%)…

Well… There is indeed a trick!! It turns out that long-term capital gains are only taxed at 15% and the Private Equity (PE) industry has battled hard to make sure that the Bush and then Obama administrations would keep the income generated by the sale of PE investment stakes classified as capital gain vs. ordinary income. Steve Schwartzman, CEO of heavyweight PE firm Blackstone, famously said that the Obama administration considering a change in that tax rule was equivalent to “a war … like when Hitler invaded Poland in 1939” among other PR gaffes…

But I digress… Going back to Romney, I believe that the numbers published yesterday will only further widen the gap between him and most folks out there. He made 14 million being on the road campaigning the entire year pretty much, thus not having a real job so to speak, and he only paid 14% on that amount in taxes – what happened to the progressive nature of taxes, one of the cornerstones of American society??

Citizen Activism and Political Courage

It is an interesting coincidence that last weekend we saw two striking examples of successful citizen activism (Planned Parenthood vs. Komen Foundation), after Komen had first announced it would stop paying for brain cancer screenings for low-income women before reversing its decision, and political courage (Bloomberg & Menino), when the New York and Boston Mayors took advantage of their teams playing each other in the Super Bowl to stand up for gun control. Those are actually two of the solutions that I suggested in my piece about Reversing Widening Inequalities.

Those are encouraging signs pointing to the end hopefully of the long apathy that has struck the US in particular since the Reagan years. And rest assured - those “small wins” matter. Planned Parenthood for instance fights an everyday battle in the trenches all over the country against extremely determined pro-life people, folks in my book who want to deprive women of a fundamental human right.

La Lucha Continua…

Reversing Widening Inequalities: A few Suggestions

In this post, I suggest solutions to solve the root causes of the widening inequalities that I identified in my previous article on the subject.

1. Change time horizon (long-term vs. short term) and reallocate shareholder value: Financial markets’ modus operandi presents the biggest obstacle for change. Large investors such as hedge funs, pensions funds, and institutional investors measure results and earn their pay based on quarterly benchmarks, thus their incentive is to maximize profits in the short run. At the same time, as noted in my previous post, the proponents of good governance agree that shareholder value gets maximized if companies focus on the long term. Jack Welch himself, aka Neutron Jack in the days when he conducted fierce restructuring processes at GE, earning him respect of adamant market supporters, has said the same for years.

Not everyone gets it in the corporate world though. Yahoo that has performed so poorly in the past few years and whose previous CEO was fired over the phone (!!) just announced that it paid its new CEO $26m – for what exactly? Probably staying on the job for more than a week…

Thus, there need to be a few corporate leaders enjoying great reputation and credibility in the business world who will come together and say that things should be done differently. This is what Howard Schultz, Starbucks’ CEO, has done with respect to political donations. “A few good men and women” have to step up and show leadership and vision.

A little research would help too. It would be useful to investigate the economic benefits that an additional dollar would bring to a rank-and-file employee vs. a CEO. What would be the macro impact for the economy if someone was paid an additional $10m a year vs. 1000 deserving employees getting an extra $10k? Granted - a corporate board is more interested to keep its leadership happy by paying them bonuses than to contribute to improving the economy. And they’d say anyway that by employing X number of people they provide them and their families with livelihoods and thus play a positive economic role – which is true. But again, the question here is one of allocation of value created. 10 million to one guy or 10k to 1000 people?

In our era can boards afford to focus only on their shareholders and senior leadership and dismiss their companies’ larger economic impact? We are all in this together, aren’t we? In societies where individualism is paramount the notion of “being in it together” does not carry much weight – in the business world maybe. But I bet ordinary people deeply relate to that notion – they feel part of the communities they live in and they care about their neighbors. More broadly, in the US in particular, Americans’ love for their country is a reflection that they feel a sense of belonging to a bigger community (the United States) and as such share a bond and responsibility with their fellow citizens. The corporate world should take note, go back to basics, and reflect the society’s view of the world.

2. Create conditions for bolder public policies: The middle class has little leverage to get politicians to come up with bolder policies that would benefit them. It can voice its concerns through its vote, but because the middle class is not organized its influence is diluted and marginal. We are talking about a large group of individuals that are disconnected from one another.

I am not sure it will be easy to get the middle class to mobilize en masse and become more active politically. Large web-based efforts that are quick and simple like signing petitions on Change.org have been successful – but mainly because they required so little effort. Folks out there are busy paying the bills and getting their kids through college. In the US in particular, most know that they will have to rely mostly on themselves as quality education for instance is generally expensive. As a result, they feel pressure to hold on to their jobs but also keep their heads down, thus reducing the likelihood that they will stand up to protest. The level of tolerance of hardship that Americans display is pretty amazing for an industrialized country.

If a broad political involvement on the part of the middle class is uncertain, politicians will have to show courage and leadership by taking measures that may be unpopular or draw a lot of criticism from the opposing party and possibly from their own camp (e.g. come up with a government-sponsored healthcare option or raise taxes). There should be recent examples - visible to all - of politicians who carried out unpopular measures but did not suffer politically.

New York Mayor Bloomberg has been unapologetic about his decisions around the use of eminent domain or around parking in the city. Yet, he has been reelected consistently. If there were more examples of politicians showing courage and not paying the price politically it may inspire more of our elected officials to be bold.

But are political courage and a greater activism of the middle class the only solutions here? Doesn’t the current political funding system encourage inertia since it relies so much on very large donors (e.g. the recently in the news Super PACS, be they individuals and corporations) who may be keen to preserve some form of status quo and also push their specific agendas? Many corporations give to both parties, which is a clear sign that they are content with the system staying the same. Would they be pleased to see a bold changemaker getting to some high office?

What would be the problem of having a political system with much smaller donation amounts? That money buys ads on TV that in general do a poor job of capturing reality. How about a level playing field with smaller donations and thus a much lower aggregate total to spend on political campaigns and ads? A lot of campaigning is done by volunteers, so having a smaller financial base would not affect volunteers’ involvement and the execution of a campaign.

This new campaign financing system would decrease the potential influence of a few large donors and thus potentially empower politicians.

3. Break the cycle of poverty by focusing on needs and results: I identified the lack of enabling context (lack of infrastructure such as public transportation or good education) as a root cause for the continuation of poverty in many areas. What would it take to have this enabling context in every community? How much would it cost? Do we even know? I think it would be very helpful as a starting point to put a number on those needs. Granted, it won’t be a straightforward and easy number to come up with but it should be possible to make an estimate regarding say the cost of a functioning public transportation system or the cost of bringing x number of students to their grade levels in reading and math. The total dollar figure is likely to be scary - but only with a number will we be able to determine how to go about finding the resources needed.

It is encouraging that the corporate community in some instances has understood the need to work hand in hand with city governments when those are not able to pay for the full provision of basic services to their constituencies. For instance, about 80 San Francisco-based hi-tech companies just created an interest group to collaborate with the City on public policies that affect them. The Chair of that alliance, angel investor Ron Conway, said “We have a vested interest in making San Francisco the “Innovation Capital of the World””.

Breaking the cycle of poverty will also be accomplished if concrete and tangible results of programs currently offered to those in need are evaluated systematically. Programs should have specific and concrete goals and objectives before they start. And they must be evaluated along the way and at their completion. There should be no sacred cows and only programs that have demonstrated results given the circumstances and context should continue to receive funding. I mentioned in the earlier post the Office of Social Innovation created by the Obama Administration that has mobilized funding ($50million appropriated by Congress in 2010 supposed to be leveraged 3 to 1) to support the replication of social programs having demonstrated success. The first grants were disbursed last year. We will stay attentive and check if that money does contribute to moving the needle on the fight against poverty.

I am ending this article keenly aware that coming up with solutions is much harder than identifying root causes. But I can’t help but think that if all those who want to bring about social change and make this world a better place contributed ideas using their experience and intellect and if we spoke to one another more, great solutions would surface eventually. We must believe in ourselves and in our capacity to move the needle!!

Santorum: Reinforcing Negative Stereotypes and the Two-Party System

I recommend this very interesting NYT article (http://nyti.ms/wvpNLu) that was published late last week and relates how Rich Santorum has made tons of money since leaving the Senate (incl. $1m in 18 months in 2009-10) by working for the very companies that benefited from the legislation he lobbied for when in Senate… Certainly not the first one in Washington to do this but that does not make it alright!!

Two conclusions here - Santorum is the ultimate insider contrary to what he wants people to think. And, how can we expect that a story like this one won’t make Americans even more distrustful of anything government and even angrier at politicians in general?

The US is fortunate to have a two-party system. Given how mad a lot of people are right now there would be a lot of room for extremist parties. The Tea Party chose to join forces with the Republican Party to have representation in the Congress and to potentially put its candidate in the White House.

But had they remained independent they could be the biggest party in the US in a multi-party system, certainly bigger than the Republican Party and potentially than the Democratic Party if a more radical left wing had emerged from the Occupy Movement and other left-wing manifestations of rejection of capitalism gone wild.

Root Causes Behind Ever Widening Inequalities

I wrote in a previous post about how inequalities have sharply widened in the past 30 years, i.e. how the middle class has been feeling the squeeze and how a lot of poor people have remained stuck in poverty while the richest have been capturing an ever growing proportion of industrialized countries’ wealth.

I will focus in this article on the root causes that I believe explain why inequalities have been so stark in a recent past after decades of more evenly distributed economic prosperity.

1. Unjust and imbalanced allocation of value created: Basically, the allocation of profits made by companies is disproportionately skewed towards shareholders and senior executives vs. employees. Companies’ boards want to keep their shareholders happy and retain their senior talent, so from their standpoint it makes sense to channel most profits that are not reinvested in the company to those folks vs. to regular employees. Corporations have managed to make money despite the crisis. As reported by Time Magazine last June corporate profits were higher in 2011 than they were in 2006 when the economy was booming ($1.7 vs. 1.5 trillion). Meanwhile, unemployment is now between 9% and 10% while it was only at 4.5% then. So, companies are certainly “lean” as we tend to hear often and productivity is up – at the cost of employment probably.

How to convince companies that part of those profits should be redistributed to employees while uncertainty about the economy is at its highest? I am not sure but I know that corporations have done little to revive the US economy even when times were better. I bet that Americans would be angry to know that from 1990 and 2008, according to that same Time article citing Nobel laureate Michael Spence’s research, “companies that did business in global markets […] contributed almost nothing to overall American job growth”. The vast majority of jobs those firms created were located in emerging markets because of those countries’ lower labor costs. Jobs created in the US came from domestically-focused sectors like hospitality, utilities, healthcare, retail, and government.

So, Corporate America seems to be more part of the problem than of the solution.

2. Short-term focus at the expense of long-term development: Most publicly-traded corporations obsess about hitting their quarterly earnings targets to keep financial markets and institutional investors happy. When they don’t their stock prices suffer mightily… The problem is that with such a short-term focus they have little incentive to make investments that would hurt their bottom line in the near term even if those proved beneficial in a more distant future.

Financial markets apparently prefer to see companies sit on $1.7 trillion of profits rather than take calculated risks (yes, times are uncertain) and invest some of those profits in something productive. How does this make sense though??

An interesting exception to that unfortunate situation is Amazon. A recent NYT article related how Amazon has chosen to focus unrelentingly on the long term, thus posting lower profit levels and disappointing the markets. Amazon’s CEO, Jeff Bezos, is absolutely unapologetic about this, pointing out that continuing to invest in his company’s infrastructure and platform will pay off eventually. When your business is logistics, it kind of makes sense, doesn’t it? Finally!!

Ironically, Amazon’s stock price (which is a reflection of how markets see a company’s future earning potential) has done pretty well – certainly much better than the NASDAQ since in the past 5 years (between late December 06 and late December 11) Amazon’s stock price posted a 341% increase while the NASDAQ went up merely by 9%.

So, this can be done… Refusing to follow financial markets’ “dictatorship” is possible.

Ask Jack Welch actually!! He would agree. Wasn’t Jack Welch, GE’s former CEO and “Uber-Leader”, the darling of Anything Corporate? Actually, Welch in line with good governance proponents advocated - for the first time way back in a 1981 speech at the Pierre Hotel - that companies should maximize shareholder value by focusing on the long term (see same NYT article). During his tenure, GE was widely viewed as “the world’s best managed company”.

So, why should companies now cave in to this narrow-minded and unproductive “financial orthodoxy”?

3. Lack of political will around programs targeting the middle class: We are hearing more that the middle class has been neglected by public policies and has been feeling the squeeze economically as a result. It’s certainly been true since 2008 but in fact for much longer - I pointed out in an earlier post that real salaries have on average remained flat in the US for the past 30 years. A case in point is how many big cities’ municipalities just gave up on keeping their downtown areas socially mixed. Revitalization of those areas in New York, Boston, and so many other big cities in the US and abroad has sought to attract wealthy new residents and tourists for the most part. New constructions have mostly targeted the rich, which indeed makes fiscal and economic sense. Cities have made money when they sold parcels they owned in “prime areas” to developers and not only do new residents pay their taxes in those cities but also they shell much higher property taxes than were collected before for the same locations.

But how does this make social sense? Middle class and poorer folks have relocated to less attractive but more affordable areas. The best neighborhoods are left to the rich and the occasional visitors – and god forbid, when social housing projects have remained in some downtown areas (as is the case in Boston for instance), the rich walk by the poor (usually, there is a “color line” too) and everyone equally distrusts and is afraid of each other. Great!!

4. Inability to break the cycle of poverty: The majority of social programs target the poor but many stuck in poverty are still there today – not counting the “new poor” who got stranded by the 2008-09 recession. For many in the US and other industrialized nations it has been impossible to break out this cycle of poverty.

This one is complicated and there are several factors coming into play. First, I feel the “enabling context” to get folks out of poverty is often not there. I am talking about the key ingredients that make it possible for people to be “productive” actors in our society. Two of those ingredients are infrastructure and education. For example, how often do we encounter in the US in particular cheap public transit systems that offer a dense network so that people can go anywhere in their urban areas in an efficient and affordable way? The absence of a solid public transportation system is an obstacle for those seeking employment (to find and keep a job). How about public education? Public school funding is fundamentally flawed in the US as about half comes from local funding and mostly from property taxes. Thus, the higher the house prices in an area, the more money goes to that area’s public school system. How can such a funding formula not generate major inequities?

Institutional racism – or broad stereotypes to use a gentler word – is another factor that undermines the enabling context. In the business world there is still an untold and implicit hierarchy – not everywhere certainly but in most places. Up there sits the “white man”. And if the white man has broad shoulders and looks like a quarterback it is even better!! The rest of the pecking order is open to discussion but certainly people of color still suffer from stereotypes and find themselves at the bottom of the hierarchy. Are we ever surprised when we see low-level jobs (fast food restaurant employees, cleaning or security folks) held by people of color?

How is this empowering to those in poverty? Don’t those stereotypes make obstacles seem even more insurmountable?

Beyond the “enabling context”, last summer’s riots in England have shown how dangerous massive cuts in social programs can be. Given current deficit levels these cuts are certainly tempting for local, state, and national governments. Eliminating programs across the board is the last thing to do but if some cuts are necessary how to decide which programs should go? That leads me to my next point, namely there does not seem to have been a systematic evaluation of social programs’ effectiveness and impact out there. Those stuck in poverty for generations have often been receiving support for a while, for instance to acquire skills or find a job. Do agencies implementing those programs know precisely how effective those have been? If the needle has not moved much in all that time, so to speak, do the folks on the ground know why and how to do a better job?

In an encouraging development the Obama administration created the Office of Social Innovation (now grouped with Civil Participation) in 2010. The idea is to replicate programs that have worked and fund their scaling in as many areas as possible.

Only when organizations implementing social programs can show what their results have been (favorable or not) will they be able to make a compelling case to keep those that have worked and channel more money towards new and improved ones.

Finally, how to make sure that those in poverty can find the courage and build the confidence to go out there, fight for themselves, and overcome obstacles? So many Americans love their country because they think that anything is possible if one is willing to work hard. And they’ll give you examples of folks who succeeded against all odds. Well, that’s the problem I have with this system – “against all odds”… As long as we don’t have a level playing field and the enabling context I mentioned above is not there it will take an extraordinary amount of courage, determination, and persistence to make it for those who were born in poverty.

Yes, those qualities are needed no matter what. Even with the support of social programs and a favorable environment around schools, infrastructure, etc. if you are a slacker, chances are you’ll be a slacker for a very long time.

But we should not expect everyone to be bootstrappers and have incredible grit, perseverance, and resolve to be able to make it out of poverty.

In the next piece concluding this series on our system’s crisis I will try to come up with solutions addressing the root causes of the wider inequalities we’ve observed.

Nutella: People Taking Notice – Finally!!

As our world is grappling with a systemic crisis, the risk of a major economic disaster in the Eurozone, the impoverishment of the middle class, and unabated poverty in most developing countries, the question, Is Nutella good for you, is on a lot of people’s minds… My post on Nutella’s nutritional benefits (or lack thereof rather) has been the most viewed article on my blog since I started it… I’ll have to think about what that means about the quality of my other posts - oh well…

But in the meantime, I wanted to follow up with some good news since an American mother earlier this year decided to sue Ferrero, Nutella’s maker, for false advertising. Read the story related on the NPR web site below.

http://www.npr.org/blogs/health/2011/02/10/133565759/a-mom-sues-nutella-maker-for-deceptive-advertising

People are taking notice – finally!! Come to think of it, this is similar to the strong reactions we are seeing among so many folks who had never been active politically before but can’t shut up anymore because they are angry, dismayed, and often disheartened. The People is rising…

The Occupy Movement and the need for a new model

As the Occupy movements are now facing bad and cold weather and the excitement from the first couple of weeks has waned, the big question is, how much of an impact will they have and how sustained will it be

The Occupy – “Indignados” movements will only succeed if ordinary people who are not activists do get involved. The usual suspects in those demonstrations and protest movements are the pacifists, the trade unions folks, etc. They certainly know something about organizing and mobilizing but I don’t think they have a lot of credibility in the general public – especially with those who do not share their political opinions. The young people whose mobilization on campuses across the US has been impressive also lack credibility because they are mostly viewed as inexperienced and idealistic. Activists who form the core of the Occupy movement have been dissenting for a long time, proclaiming that our system was flawed (and they were probably right about that). But ironically, they do not represent change since they have been at it for so long.

They are however capturing the “zeitgeist” as their anti-globalization / anti-capitalism rhetoric and agenda resonate with people angry about the current economic situation and consequently about our system that supposedly has created that mess. Americans – usually among the most disciplined ones and those who believe in the benefits of capitalism - are upset about high unemployment that, contrary to prior recession or slow growth periods, is barely going down and about rocky stock markets that experience large swings from one day to the next.

The Occupy – “Indignados” movements will have a long-term and significant impact if they can lead or actively participate in the reflection about the changes needed in our system. Despite the growing consensus that our system needs to be fixed there hasn’t been a concerted effort so far to carry out that thinking process.

The Occupy folks will probably have a more radical view than I on the question but I don’t believe that fighting capitalism all the way and making it evil, responsible for all the injustice and the suffering in this world, is the solution. The emergence of the middle class after World War II in Western societies, which meant that millions got out of poverty over these couple of decades, took place in a mostly capitalist society – but one that was more just and balanced.

In the 80’s a shift occurred as a result of the “Reaganomics”, the conservative economic policy that Reagan and Thatcher implemented for a number of years, and the gap between the rich and the poor started widening again and the middle class increasingly felt the squeeze. Real salaries (adjusted for inflation) have been flat on average in most Western countries since that time while wealth is increasingly concentrated in fewer hands.

The average difference in salary between lowest paid workers and CEOs were 1 to 8 in 1980. Things are slightly different today – for instance, the CEO of CBS, the US media company, made an astounding 60 million last year. If folks in the CBS mailroom made say $20k, the 1 to 8 ratio skyrockets to 1 to 3000!!!

Thus, in richer nations inequalities have been on the rise while some populations have been stuck in poverty for years. In the meantime, the situation in the Global South is not tremendously better. Even in China, India, and Brazil which are rightly viewed as success stories, significant inequalities persist. And a lot of other nations are still struggling with poverty even though they have received development cooperation aid and benefited from foreign direct investment for a long time, often have a talented work force, and, in some cases, enjoy natural resources that constitute a major source of income.

I will write more on ideas to reform our system in my next post, with a focus on industrialized countries as emerging / developing countries have to contend with particular issues that make their situation even more complex.