20 March 2015 | By ken in Society | No Comments Yet

Freedom of Choice

We think of pizza by the slice, sometimes a whole pie, so we haven’t noticed how big an industry it has become. But Big Pizza is as big as virtually anything else in our economy – and as political.

A new Bloomberg report notes that while some parts of the food industry have responded to pressure from government agencies and food activists to offer healthier options, the pizza sector has chosen instead to fight back.

Reporting on this in The New York Times, Paul Krugman noted what has become by now a familiar story: “The pizza lobby portrays itself as the defender of personal choice and personal responsibility. It’s up to the consumer, so the argument goes, to decide what he or she wants to eat, and we don’t need a nanny state telling us what to do.”

Yet as more Americans become obese, it has become a public health issue, one that we all end up paying for. Moreover like most things in our country, it has become a focus of partisan politics. Krugman notes that “heavier states tend to vote Republican.” They are well represented in what “the Centers for Disease Control and Prevention call the “diabetes belt” of counties, mostly in the South, that suffer most from that particular health problem. Not coincidentally, officials from that region have led the pushback against efforts to make school lunches healthier.”

To be sure, kids, being kids, often don’t like their spinach, and they will go hungry until they pass a Pizza Hut on the way home. But that’s just the point of departure for what has become a war, as “major pizza companies have become intensely, aggressively partisan. Pizza Hut gives a remarkable 99 percent of its money to Republicans.” Krugman concludes: “over all, the politics of pizza these days resemble those of, say, coal or tobacco.”

In their book, Nudge, published a few years back, Richard Thaler and Cass Sunstein proposed an approach to such problems they called “libertarian paternalism.” That is, they suggest, “choice architects” can subtly influence personal choices. One of the examples they offer is the organization of food in school cafeterias. How it is displayed and where it is placed can induce students to pick healthier meals – or cookies, chips and fries. Nothing is forced, but choice architects help us steer a middle course between authoritarian control and random exposure to temptation.

The Pizza Industry works the other side, using advertising and promotions to influence us in the direction of pepperoni, extra cheese, calories and fat because that is where the profits are. In both cases our unconscious is at work, as we end up making choices without really thinking about them.

To be sure, we are not going to choose something we don’t like. Spinach will probably never prevail, at least among kids. But the more we think about anything the more options we end up having, and this is just where those who want to promote health, especially among children, might concentrate their attention. In addition to drugs, we could work on developing options that will help “choice architects” steer kids towards health.

It has to work below the radar. If people feel they are being controlled they will rebel, and the food industries whose profits are at risk will help them fight back. In an environment unfriendly to health, consciousness helps us choose wisely. But typically we let our minds follow the path of least resistance.

Negative Interest

05 March 2015 | By ken in Society | No Comments Yet

A Glimpse Through the Looking Glass

This is odd: “about $3 trillion of assets in Europe and Japan … now have negative interest rates.” That means depositors have to pay banks to hold their money. Sounds like Alice in Wonderland.

Why would anyone agree to that? Why not just keep your money in the cookie jar or under a mattress? But Nouriel Roubini, the economist, called “Dr. Doom” for predicting the 2008 crash and subsequent depression, had some good answers to that question in his commentary on Project Syndicate. For one thing, those of us who maintain balances in our checking accounts without interest are doing virtually the same thing, when you factor in the depreciating effect of inflation. We may be losing a bit of money, but it’s safe in the bank, and it’s accessible. If we live in economies threatened with significant deflation, it makes even more sense. On the other hand, if you keep it at home, it could get lost or stolen or by eaten by mice.

The more interesting question is why would banks would want to offer negative interest? There are real limits to profitability as the rates are usually nominal, and I can’t imagine them relishing a competition with each other to pay out more.

Governments like it, however, especially in a time when economies are stagnant. It encourages people to spend. If there is a cost to parking your money in a bank, you’re more likely to buy that new car instead or take the vacation you’ve been putting off.

But at a time when there are powerful arguments to break up banks that are “too big to fail,” it is also a way to keep them under control and demonstrate their usefulness. Negative interest will not flood them with cash, encouraging them to speculate. Investors will be less inclined to expect them to generate outsized profits. And that together with regulations requiring them to hold on to more of their assets to cover potential losses (a topic I covered in my last post), it does a lot to restore banks to their traditional role of protecting against speculation and volatility.

That’s not being said, of course, as bankers have gotten used to using our money to make more money for themselves, no longer being content with their traditional, conservative role. They are not actually arguing for negative interest – or, even, offering it to their customers, at least in this country. It’s just not profitable enough.

But it would make our financial system more secure. It also sends a message that money isn’t just an opportunity to make more money, and that bankers can be more than just “a lot of mouths with expensive tastes,” as Warren Buffet characterized them a few days ago.”

Negative interest will not have a major impact on our financial system. Roubini reminds us that solving our economic problems would require far more significant efforts: “central banks and fiscal authorities need to pursue policies to jump-start growth and induce positive inflation.” That would require “fiscal stimulus, especially public investment in productive infrastructure projects, which yield higher returns than the bonds used to finance them.”

But it might get us all thinking.

Banking Reform Comes Through the Back Door

23 February 2015 | By ken in Society | No Comments Yet

“A Humbling Transformation”

After many high profile failures to reform banking, thwarted by the power of the banking lobby, including efforts to break up banks “too big to fail,” it now seems that a simple and obvious rule has made a significant difference. The Federal Reserve ruled that they simply had to keep more cash on hand to cover potential losses.

For many years, including those leading up to the credit bubble and the 2008 crash, banks ingeniously tried to increase the leverage of their assets. They took liabilities such as mortgage debt and repackaged them as bonds, simultaneously removing them from the negative side of their balance sheets and creating new products to sell, in effect, adding new assets.

Assisted by the ratings agencies that did not fully grasp the slight of hand involved and gave the bonds “Triple A” ratings, those bonds proved wildly popular with investors. That is, until the collapse of the housing industry exposed the fact that the bonds were not actually assets, but based on debt, bad debt. Subsequently, the Fed ruled that the banks had to keep more cash on hand, real cash, not speculative cash.

The banks’ efforts to thwart this new rule were ineffective because the logic behind it was so obvious. Clearly, banks had to remain solvent to protect those who entrusted their money to them, and they had failed at that, forcing the government to bail them out. Then the role of the mortgage-backed securities in our economic collapse was obvious when tens of thousands of home-owners defaulted on mortgages that the banks and mortgage companies who sold them knew they had little chance of paying off. The bonds then proved virtually worthless.

This common sense step has led to what The New York Times has called “a humbling transformation” in the banking industry. The banks had gotten used to huge profits as a result of their freedom to speculate.

This new rule, obvious in the light of what happened, has led to what
the New York Times has called “a humbling transformation”
in the banking industry. Now with their hands tied, unable to
speculate as freely as before, “Bonuses are shrinking. Revenue growth
has stalled. Entire business lines are being cut.”

As Timothy Geithner, the former Treasury secretary, put it: “We have substantially reduced the amount of risk they can take.” Less risk, less profit – but less risk to us all.

There is something relieving to see common sense, once again, at work in the financial industry. We have gotten used to thinking only Nobel laureates could understand it, which has had the effect of making us all vulnerable to fraud. Perhaps there can be an influx of common sense in other ways as well: cutting taxes reduces revenue, does not increase it; eliminating estate taxes does not benefit the poor, who have no estates; moving our businesses off shore only benefits shareholders, not job holders, while forcing government to raise revenue elsewhere.

The Times quoted a bank analyst: “You are hard-wiring a change into the banking industry. . . . When we look back 10 years from now, we are going to say the biggest impact was from capital rules.”

Corporate Succession

16 February 2015 | By ken in Society | No Comments Yet

Getting It Right

Disney’s CEO, Robert Iger, is getting a lot of credit in the press for designating his eventual successor, even though the succession will not occur for 3 more years. That may be because his own ride to the top was so bumpy.

As James Stewart put it in the Business Section of The Times: “Mr. Iger’s predecessor, Michael Eisner, elevated and discarded some prominent candidates to succeed him — Jeffrey Katzenberg and Michael Ovitz, in particular — in a multiyear drama that eventually led to a shareholder revolt and Mr. Eisner’s ouster.” Eisner made a mess of it, and Iger may well have wanted to avoid that spectacle.

There are a lot of reasons for the process to be troubled, starting with the fact that the person leaving the top job can be ambivalent about giving up the powerful role. He may not want to leave, even if the must. Or more narcissistically, he may not want to be succeeded by someone who will be seen as better than he was.

David Larcker, a professor at the Stanford Graduate School of Business noted that “the track record for handpicked successors who follow highly successful chief executives isn’t encouraging. In a recent research paper, he found that the share price of companies run by chief executives who were selected by their predecessor tends to underperform the Standard & Poor’s 500, sometimes by large percentages.” (That’s how corporate boards assess success.)

The reason, he suggests, is what he calls the “Mini-Me syndrome,” the tendency of CEOs to prefer people like themselves. (Not as capable of being successful, like them, I suppose he means, but similar in a way that blinds their judgment.)

In this case, Thomas Staggs, Iger’s chosen successor sounds as if he could not be improved upon. According to The Times, Staggs “is very artist-friendly. He’s a musician. He’s warm and friendly, and he’s got a gorgeous family.” He “is also popular on Wall Street and was repeatedly named by Institutional Investor magazine as the entertainment industry’s top chief financial officer.”

What concerns me here is that is seems almost too perfect for the part.
The really important question, though, is he good enough for the job?
Absent in this account of succession is any attempt to characterize the
problems he will face or to assess the special qualities or strengths he
would need to bring to solving those problems.

Maybe because Disney is in the entertainment business, they think
primarily of casting the role, but the account in The Times lists a
multitude of issues he will face.

One man who worked closely with Staggs mused: “The problem, if there is one, is how big can Disney get? How do they keep the growth rate?” As The Times noted: earnings showed “a 19 percent increase over the previous year. . . . Last week, the stock hit a record high of $102, and it is up more than 30 percent over last year. . . . But the studio entertainment division’s 33 percent gain and the closely related consumer products earnings increase of 46 percent were even more impressive because of Disney’s remarkable series of hit feature films.”

Stock analysts and investors expect continuous growth, and that’s how Staggs will be measured.

Our Hidden Oligarchs

05 February 2015 | By ken in Society | 2 Comments

Yet More Ominous Economic News

Awareness of our still growing income inequality has spread widely, and new accounts are accumulating weekly in the media. Last week, Oxfam issued a report, “Working for the Few,” and the economist Emanuel Saez just released a preliminary analysis of 2013 income figures showing: “so far all of the gains of the recovery have gone to the top 1 percent.”

Even the President, getting the message, referred to “middle class economics” in his SOTU speech.

But this growing consensus is now starting to obscure something even more ominous, the rise and influence of an oligarchy that has captured our political process to protect its outsized wealth. We’re not talking 1 percent, though. It’s more like .001 percent.

As Jeffrey Winter recently pointed out, in his extensively researched book Oligarchy, (published by the Cambridge University Press) oligarchs in the modern world do not exert control directly. Working though what he calls the “income defense industry,” they make sure that their wealth is protected by armies of lobbyists, lawyers, accountants, advisors and tax consultants who work on their behalf, protecting their wealth from taxation and inheritance levies.

In a modern democracy, Winters argues, oligarchs benefit from the legal power of the state, so they do not have to hire mercenaries to protect themselves and their wealth. Indeed, they virtually disappear among ordinary citizens and their well-established legal guarantees. That ensures their wealth will not be confiscated. And there are stable political processes they can manipulate to protect their interests. They do not have to be seen or, even, act on their own behalf. They seldom even run for office. Their money does all the work.

As Winters puts it: “Indeed, the absence of the more frontal and visible aspects of oligarchy leads to the mistaken impression that there are no longer any oligarchs.”

Moreover, in the west we have a very active celebrity culture that distracts the attention of the public and spares our oligarchs uncomfortable scrutiny. They do not have to play the role of nobility. To be sure, they get maximum attention when they endow hospitals, universities and concert halls. In fact, our society has come to feel dependent on their largess as public funds are increasingly unavailable to meet our large scale cultural and artistic needs.

We get to use these facilities and feel grateful of the donors’ largess, perhaps even admiring them for their generosity, usually unaware that the tax policies supporting them are also shifting the burden of essential services on to the middle class. What our oligarchs don’t pay in taxes to support new roads, medical care, law enforcement, defense, etc. etc. comes disproportionally out of middle class income.

Winters also makes the point that this arrangement is unlikely to change as our political process, underwritten by the campaign donations of our oligarchs, makes taxes unpopular. In fact, one might think that estate taxes that only affect the super rich could gain support among the many who are extremely unlikely to come close to ever having to pay them. But that has proven not to be the case.

Our oligarchs have done their job well, and it looks like they are here to stay.