Chrystia Freeland http://blogs.reuters.com/chrystia-freeland Wed, 31 Jul 2013 11:14:54 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.5 Retooling capitalism for the social good http://blogs.reuters.com/chrystia-freeland/2013/07/19/retooling-capitalism-for-the-social-good/ http://blogs.reuters.com/chrystia-freeland/2013/07/19/retooling-capitalism-for-the-social-good/#comments Fri, 19 Jul 2013 20:47:03 +0000 http://blogs.reuters.com/chrystia-freeland/?p=2001

When the financial crisis threatened to topple the global economy, my Russian friends took great delight in calling me from Moscow and sharing the bittersweet response that was making the rounds of a city that always laughs loudest when things go wrong: Everything Marx told us about communism was false, the gag went, but everything he told us about capitalism was true.

In 2008, it was easy to see their point. The lopsided recovery hasn’t brought much comfort, either. Across Western Europe and North America, corporate profits and stock prices have rebounded, but the middle class is more squeezed than ever.

Even so, my Muscovite pals were wrong. Marx didn’t just get communism wrong – he was also profoundly mistaken about capitalism, which turns out to be the best prosperity-creating system humanity has come up with so far.

But that doesn’t mean it doesn’t need to evolve. The high-tech, globalized capitalism of the 21st century is very different from the postwar version of capitalism that performed so magnificently for the middle classes of the Western world.

That’s why a lot of people, including many hard-driving capitalists, are trying to figure out how to retool the institutions of capitalism for our time.

This week, the state of Delaware, which has made corporate governance its regional cuisine, approved a new form of incorporation, the B-corp, or benefit corporation. These are companies explicitly charged with a dual mission: to earn profits for shareholders, the traditional business goal, and also to pursue the social good in other ways, ranging from protecting employees to safeguarding the environment – even if these goals come at the cost of short-term financial gain.

Jack Markell, Delaware’s governor, traveled to a seminar discussion in New York on the sweltering day his state signed B-corp into law. “This is a very significant public policy issue,” he said. “There is both a market need and a societal need.”

Markell admitted that “there are a lot of skeptics out there,” but he said the B-corp status was an important response to a world in which the way we do business has changed.

“When businesses first started up, they operated in the communities where they existed. This was where the executives lived,” Markell said. Because they were so deeply rooted in particular communities, they didn’t need legal structures that required them to take into account all of their stakeholders – social pressure served that role.

In today’s virtual, global economy, those personal constraints are eroding fast. The B-corp structure is a way to recreate them.

Markell believes there is a hunger among investors and entrepreneurs to both do well and do good: “What an unbelievable opportunity this represents to harness the energy of entrepreneurs who are really focused on making money and who want to give back at the same time.”

Albert Wenger, a partner at Union Square Ventures, a New York-based investment firm, buys that argument. He was at the seminar with Markell, and in a blog post earlier that day, he laid out what he sees as the critical challenge for capitalism today: “Our problem as society is no longer how to make more stuff. Cars, clothes, computers are all becoming better and cheaper.”

Instead, Wenger argued, “Our biggest remaining problems, however, require social innovation: How to distribute the benefits of progress more widely, how to live in better harmony with the environment and how to provide affordable access to education and healthcare for all.”

The good news, Wenger believes, is that it is not just Occupy Wall Street that has focused on this dilemma. Business people are worried about it, too. “At Union Square Ventures, we are seeing more and more entrepreneurs and startup employees who are motivated as much by making the world a better place as they are by making money,” he said.

The optimists at the B-corp discussion, which was hosted by the World Economic Forum, hoped that doing well and doing good could be seamlessly aligned. They argued that by freeing businesses to be mission-driven and pursue long-term goals rather than short-term profits, and by appealing to a new generation of idealistic consumers, B-corps could be as, if not more, profitable as traditional companies that maximize shareholder value.

That is a comforting thought. Frederick H. Alexander, the former chair of the Delaware Bar Association’s Section of Corporation Law, suggested a tougher possibility.

“Part of the struggle is facing up to the hard facts,” he said. “The basic thing that underlies a B-corp is that you don’t have to maximize shareholder value. You are accepting the possibility of a lower return.”

That may have been common sense for the Greatest Generation. But for most of us today, that notion of voluntarily forgoing higher profits for the benefit of the wider community is, as Alexander put it, “counterintuitive.”

The B-corp structure is part of a wider movement to make that trade-off more natural. As Alexander said, “the issue is, do you want to conduct your investments in the way you wouldn’t conduct your life.”

That is a very good question, and one we have gotten out of the habit of asking.

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Mysteries of the middle class http://blogs.reuters.com/chrystia-freeland/2013/06/28/mysteries-of-the-middle-class/ http://blogs.reuters.com/chrystia-freeland/2013/06/28/mysteries-of-the-middle-class/#comments Fri, 28 Jun 2013 18:28:01 +0000 http://blogs.reuters.com/chrystia-freeland/?p=1994

If you are worried about the Western middle class – and we all should be – you may have started to have some doubts about the virtues of flexible labor markets. In theory, flexible labor markets should make our economies more productive, and all of us richer, by making it easier for people to do the work the economy needs and to stop doing the work it doesn’t.

In practice, though, some economists who once championed flexible labor markets without reservation, like Daron Acemoglu of the Massachusetts Institute of Technology, have begun to have second thoughts. Acemoglu doesn’t doubt the positive economic effects of flexible labor markets, but he has begun to be concerned about their political and distributional consequences. They might help the economy grow overall, but they may also be contributing to the hollowing out of the middle class by weakening its political bargaining power.

That’s why a recent paper by Joao Paulo Pessoa and John Van Reenen, both of the Center for Economic Performance at the London School of Economics, makes such fascinating reading. Van Reenen and Pessoa set out to unravel the two big mysteries about Britain’s economic performance over the past five years. The backdrop to both is the devastation that Britain, with its oversize banking sector, suffered in the wake of the 2008 financial crisis.

“The big story in the UK is that the economy has shrunk by 2.5 percent since the pre-crisis period,” Van Reenen told me. “That’s the longest depressed economy in this country for more than a hundred years.”

Britain’s dismal economic performance certainly helps to explain the grimness of British politics at the moment, and the growing appeal of the nationalist fringe. But the story becomes more mysterious when you start investigating what is happening inside the country’s shrunken economy.

Given the prolonged recession, economists would normally predict that unemployment would soar. It has risen, but, Van Reenen said, “not nearly as much as you would expect, and not as much as in, for example, the United States,” where the economic contraction has not been as prolonged. So, when it comes to jobs, Britain has surprised on the upside.

The second riddle is a less cheerful one: While employment has held up relatively well, given the country’s poor economic performance, productivity has plunged, an unanticipated departure from the pre-crisis trend line.

“We are 12 percent lower in productivity today than we would expect,” Van Reenen said. “That is the puzzle. Why has this happened? Have we gotten more stupid?”

Van Reenen and Pessoa propose a single answer to these two mysteries: flexible labor markets. In contrast with previous economic downturns, the British economy today has a much less sheltered workforce. The result is what classical economic theory would have predicted: The job market has adjusted more successfully to the shrinking economy than it did during previous downturns.

But that good news comes at a price: The flexibility in the British labor market has been in wages, which have shrunk even more than the economy as a whole.

“In this recession, unions are much weaker than they were in the 1980s, and we’ve had welfare to work reform, so there’s a lot more pressure on people to find jobs,” Van Reenen said. “The labor market is much more flexible, which means wages fall. That is bad news for the people whose wages fall, of course, but the positive side is that employment has stayed up. Some pay is better than no pay, at least in a recession.”

It is easy to understand how Van Reenen’s labor market theory explains the combination of falling real wages and relatively strong employment at a time of economic slump. What’s less obvious is how weak productivity fits into the story.

He believes that, too, can be explained by flexible labor markets. Workers have become cheaper in Britain and, despite low central bank interest rates, capital is still expensive for many firms, or hard to come by. As a result, Van Reenen argues, “instead of investing in machines, firms are keeping on workers.” That means each hour of human work is less productive.

Van Reenen and Pessoa’s paper is thought-provoking because it connects the two British economic phenomena that are inspiring a great deal of hand-wringing – falling productivity and falling real wages – with the one bright spot in the British economy: the relatively low increase in unemployment.

As in Germany, where job cuts were avoided thanks to more formal deals to decrease the hours and pay of a wider group of workers, Britain’s flexible labor markets allowed a lot of people to weather the recession by pricing themselves into a shrunken economy.

There remains, however, a significant caveat. The relatively benign workings of flexible labor markets that Van Reenen describes are in response to the cyclical shock of a recession. British workers in the middle and across the Western industrialized world more generally are also being pressed by broader structural economic forces.

“I think the squeezed middle class is likely to continue,” Van Reenen said. “The combination of technological change and outsourcing is going to continue to put pressure on median wages.”

“What to do about it is the question,” he said. “I don’t think the answer is smashing the machines or closing the borders. As we come out of the recession, this is going to be the key question of the next 20 years.”

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Economic worries and the global elite http://blogs.reuters.com/chrystia-freeland/2013/06/17/economic-worries-and-the-global-elite/ http://blogs.reuters.com/chrystia-freeland/2013/06/17/economic-worries-and-the-global-elite/#comments Mon, 17 Jun 2013 15:46:33 +0000 http://blogs.reuters.com/chrystia-freeland/?p=1990

Here’s one sign the global elite is starting to get worried that capitalism isn’t working for the Western middle class. At the TED Global gathering in Scotland’s elegant capital city this week, much of the spotlight was on what’s going wrong with the 21st-century economy.

That matters because the TED conferences are one of the obligatory stops on the itinerary of any self-regarding plutocrat, and in the past that constituency has often preferred its vision of the economic future served sunny-side up. (TED stands for technology, entertainment and design, and is a not-for-profit global conference organization.)

The gloom started with former Prime Minister George Papandreou of Greece. In a remarkably candid and introspective talk, Papandreou offered a mea culpa for his own mistakes and those of the European political elite. He admitted that hardship had been imposed on people who were “in the main, not to blame for the crisis” and accused the European establishment of uncritically, and at great cost, clinging to “the orthodoxy of austerity.”

Small Greece, he argued, had been made the scapegoat for a larger political and economic failure. As Papandreou mockingly put it, Europe chose to point the finger at “those profligate, idle, ouzo-swilling, Zorba-dancing Greeks.” Instead of addressing the harder, underlying issues, the impulse was to say: “They are the problem! Punish them!”

Papandreou is a son of privilege – both his father and grandfather were prime ministers of Greece – but, in a sign of the times, he inveighed against “plutocrats hiding their assets in tax havens” and “powerful lobbies protecting the powerful few.” His comments made an impact partly because he was so open in declaring his own shortcomings. Nor did he shy away from how angry a lot of people are about them.

“It’s no wonder many political leaders, and I don’t exclude myself, have lost the trust of our people,” Papandreou said, in the most affecting passage of his talk. “When riot police have to protect parliaments, a scene that is increasingly common around the world, there is something wrong with our democracies.”

For the chosen few inside the TED hall, Papandreou also inadvertently served as a physical reminder of how bitterly felt the rage is among some of the masses on the outside. Gray, rainy Scotland is a long way from Greece, but even here, Papandreou was greeted by protesters incensed at the pain his austerity measures imposed on his country. The city’s gracious, granite streets were plastered with posters calling on Papandreou to go home and attack austerity across Europe.

That was just a start. A session devoted to “Money” offered more critiques. Didier Sornette, a professor of risk at the Swiss Federal Institute of Technology, took the world’s financiers to task for being so bad at anticipating asset bubbles. Booms and busts, he asserted, are predictable and often controllable, and he offered his own technique for spotting them.

Next up for a flogging were the ratings agencies: Annette Heuser, executive director of the Washington branch of the Bertelsmann Foundation, based in Germany, denounced them as opaque, conflicted and dangerously powerful.

“The sector needs a complete overhaul, not just a trimming around the edges,” Heuser said. “We’ve left the major financial players alone for too long.”

The credit ratings of countries, she argued, need to be redefined from a profit-making business to a public good, and she outlined her effort to create an international not-for-profit organization that could challenge the oligopoly of the ratings agencies.

Most passionate of all was Mariana Mazzucato, a professor of economics at the University of Sussex, in England. Her gripe was with the familiar characterization of the private sector as the sole source of innovation and creative thinking and of the state sector as a Kafkaesque world of inefficiency, bureaucracy and frustration.

The reality, Mazzucato said, is that the state is responsible for some of the most essential, and initially risky, innovations in our world today, ranging from the Internet to “the cool, revolutionary things in your iPhone.” The state, she argued, is a “market maker,” whose ability to take bold, risky bets is critical for economies to grow at the global cutting edge.

Disclosure alert: I was a speaker, too. I talked about my chief obsession, soaring global income inequality, particularly at the very top of the pyramid, and the uncomfortable fact that the same forces that are enriching the global super-elite are hollowing out the middle class in the Western developed economies. Making capitalism work for everyone, and not just the plutocrats, I argued, is our most pressing political and economic problem.

Taken together, and given the gilded venue, all of these comments amount to a significant shift in tone. Charlie Robertson, the global chief economist for Renaissance Capital, the Russian-based investment bank, was moved to post on Twitter, in reaction to the TED lineup, that the “intellectual ascendancy of neo-liberalism since 70s may be in retreat.”

That is probably going too far. But we do seem to be at a turning point, or the beginning of one. Judging by this week in Edinburgh, even the winners in the global economy are beginning to realize that there are a lot of losers, too, and that that’s a problem. You might see that as too little too late; you might also see it as, at long last, a start.

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An elite deserving of the name http://blogs.reuters.com/chrystia-freeland/2013/06/13/an-elite-deserving-of-the-name/ http://blogs.reuters.com/chrystia-freeland/2013/06/13/an-elite-deserving-of-the-name/#comments Thu, 13 Jun 2013 16:32:56 +0000 http://blogs.reuters.com/chrystia-freeland/?p=1986 This book review originally appeared in Democracy: A Journal of Ideas, and is reprinted with permission.

As the twenty-first-century American middle class gets squeezed, with little relief in sight, liberals are wistfully remembering something about the postwar era that they had energetically forgotten. That age of suburban conformity and institutionalized sexism and racism was also a time when big business believed in government and worried about the common good, and was willing to pay for both.

Reminding us of that era, and documenting the engagement between the corporate class and the state during the 1940s, ’50s, and ’60s, is the most valuable contribution of The Fracturing of the American Corporate Elite by Mark Mizruchi. The University of Michigan business school professor, who has written three previous books about the practices and culture of the American corporation, offers a compelling history of how the American corporate elite reconciled itself to the New Deal, and then, in the aftermath of World War II, signed on to a vision of America in which government played a muscular and essential role in steering the economy and underwriting the well-being of the middle class.

The business heroes in this narrative are the leaders of the “moderate, pragmatic corporate elite [that] had emerged, based primarily in the largest American corporations” by the end of World War II. This elite and its views were “epitomized” by the organization whose history forms the backbone of Mizruchi’s narrative, the Committee for Economic Development (CED). Formally incorporated in 1942, the CED brought together engaged, moderate businessmen from across the country and advanced their views in the major national debates of the subsequent decades. They were an illustrious group: As of July 1945, the CED’s trustees included a senior partner at Goldman Sachs, the chairman of Coca-Cola, the president of General Electric, and the presidents of the Federal Reserve Banks of Boston and St. Louis.

The CED, in Mizruchi’s telling, thought the days of untrammeled free-market capitalism were gone, and that both private and government-led economic management would be necessary for a market economy to survive. In order to maintain the system from which their privileges derived, they believed it would be necessary to attend to the welfare of the broader population. This meant supporting a high level of employment, the alleviation of poverty, the amelioration of racial disadvantage, and the provision of sufficient purchasing power in the population to consume the goods that American business was so proficient at producing.

This was the creed of the nation’s most influential corporate leaders, a group that supplied Cabinet secretaries to both Republican and Democratic Administrations. Today, with so much of the national economic conversation consumed by the budget deficit and which middle-class entitlements need to be cut to reduce it, that platform would place you on the left wing of the Democratic Party, and no leading business organization would advocate it.

Mizruchi openly admires this postwar elite and argues that its decline “has played a major role in the crisis of twenty-first century American democracy.” That argument is a nice antidote to this country’s historical amnesia, particularly when it comes to relations between the private sector and the state. What is less clear is whether, as Mizruchi hopes, that productive postwar relationship among business, government, and society can be recreated today. One reason to be pessimistic is that the current arrangement, notwithstanding the author’s protestations to the contrary, is serving America’s business elites remarkably well.

We live in the era of Grover Norquist’s tax pledge, and an age when respected financiers casually describe President Obama’s unsuccessful effort to close private equity’s favorite loophole, the carried-interest provision, as comparable to Hitler’s invasion of Poland. It is thus bracing to be reminded that once upon a time, business actually advocated tax increases to fund things like infrastructure and war. Mizruchi’s account of the public debate over how to pay for the Korean War is particularly instructive. The CED advocated a $10 billion tax hike, including an increase in the tax on dividends, a charge squarely aimed at the share-owning class. After the truce in Korea, the U.S. treasury did not immediately recover. To refill the national coffers, President Eisenhower sought a six-month extension of the excess profits tax, a levy charged on the “excess profits” companies made as a result of increased defense spending. Inevitably, the excess profits tax was one of business’s least favorite measures—but even so, the CED backed Eisenhower’s proposal. As late as 1989, big business aggressively lobbied for higher taxes at critical moments. It sounds inconceivable today, but Fortune magazine welcomed George H.W. Bush to the White House with a cover story a few days before his inauguration that declared, “CEOs to Bush: Raise Taxes Now.”

Another forgotten chapter in the history of blue-chip America that Mizruchi highlights involves health-care reform. Fox News and Tea Party adherents would probably be surprised to learn that in the past half-century, America has had one President whose health-care ambitions were more radical than anything Bill Clinton proposed or Barack Obama achieved. His name was Richard Nixon, and his plan “closely mirrored” an earlier proposal advanced by the CED. Nixon’s blueprint “included a mandate that all employers provide health insurance for their employees and pay at least three-quarters of the cost, as well as a government-run system for everyone not covered by employer-based insurance.” Nixon wanted to cover dental care for children and cap the out-of-pocket cost per family at $1,500 each year, regardless of the total cost of care received.

Nixon’s plan, of course, was stillborn, and U.S. health care remained a mess. Mizruchi argues that during the 1980s, reform became an even greater priority for the business elite. That makes sense, he believes, because of the costs America’s inefficient health-care system imposed on the employers who often had to provide it. After all, state-supplied health care could be the businessman’s friend, as Chrysler and Caterpillar executives were quoted as saying in a front-page New York Times story from 1991. Shouldn’t American CEOs resent having to supply their workers with something their European and Canadian competitors can count on the government to provide? And shouldn’t they have energetically applauded an effort to shift that burden to Uncle Sam?

So why was big business unable to support either the Clinton or the Obama health-care reform efforts? One reason, according to a Fortune 500 CEO Mizruchi quotes, is an ideological conviction so deep it trumps the bottom line. “One [view] inside the business community is a belief that anything the government touches is bad,” the executive said. “There are many who, regardless of any pragmatic benefit to their company, are opposed in any way to government run programs, government mandated programs. It just doesn’t sit well with their philosophy.” That’s a powerful admission. One reason we give weight to the political recommendations of business leaders is their economic expertise. Just as climate scientists have special authority when it comes to the environment, businesspeople have special authority on economic policy. But if, as Mizruchi’s anonymous CEO says, they are actually just advocating their personal beliefs, one wonders whether they merit a privileged place in the national conversation.

Even more interesting is Mizruchi’s argument that CEOs’ failure to support health-care reform was driven by the perverse incentives inside the bureaucracies over which they themselves preside. Mizruchi found that CEOs were ambivalent about health-care reform. But their human-resources executives were unanimous in opposing it, and they were sometimes willing to admit openly that their hostility grew out of the fear that reform would make their own jobs as administrators of corporate health-care plans redundant. If you get the joke in any Dilbert cartoon, this scenario will instantly make sense—anyone who has actually worked inside a big company knows that bureaucratic dysfunction is not the sole province of the state.

Mizruchi’s secret history of a time when corporate America believed in government and in paying taxes—and the riffs he adds to the more familiar tune of how business became more conservative—are assembled here in the service of a larger argument: This right-hand turn by the country’s corporate elite has been bad for business and bad for America. Mizruchi describes a business elite that has become fragmented, irrelevant, and powerless to solve the problems—like mounting national debt, decaying infrastructure, and failing schools—that, in the long-term, will hurt the vested interests of corporate America.

As Mizruchi knows, most liberals worry business is becoming too powerful in politics; his contrarian argument is that America suffers from the opposite problem—the absence of a pragmatic, united business elite at the top of national politics has left us ill-equipped to handle our pressing public concerns. It’s an iconoclastic thesis that both excites and scares him. “It is ironic that I would be writing about the postwar American corporate elite as a model for responsible leadership,” he admits. “I spent the early part of my career characterizing these people as the ‘bad guys,’ and there certainly was plenty about which to complain.”

But he doesn’t pursue the truly unexpected and uncomfortable paradox his historical study reveals. When America’s postwar corporate elites were sexist, racist company men who prized conformity above originality and were intolerant of outsiders, they were also more willing to sacrifice their immediate gain for the greater good. The postwar America of declining income inequality and a corporate elite that put the community’s interest above its own was also a closed-minded, restrictive world that the left rebelled against—hence, the 1960s. It is unpleasant to consider the possibility that the personal liberation the left fought for also liberated corporate elites to become more selfish, ultimately to the detriment of us all—but that may be part of what happened. The book sidles up to but doesn’t confront head-on the vexing notion that as the business elite became more open and meritocratic, it also became more selfish and short-termist.

This disquieting correlation is apparent in Mizruchi’s discussion of what he calls “the new chief executive officer.” He appreciates one of the realities of the lives of America’s corporate chieftains that is sometimes lost when we look only at their paychecks. Since the early 1980s—not coincidentally, the period when the book shows the corporate elite became more conservative and more skeptical of the state—CEO compensation has soared. But Mizruchi understands that these surging financial rewards came with strings attached—in this case, a loss of control over their domain, what Mizruchi calls decreased “autonomy.”

In the immediate postwar era, corporate managers held a tight grip over their firms and their own careers. Then, in the 1970s and ’80s, the capital markets began to assert themselves. Investors mounted, and won, hostile takeover bids against managers who were underperforming. Even CEOs who avoided that fate faced more assertive shareholders. Chief executives who were once kings now had bosses who could fire them. In 1982, the average CEO tenure was 9.7 years; by 2002, it had dropped to 6.8 years. But chief executives were amply compensated for their loss of autonomy; between 1978 and 2011, CEO compensation increased more than 725 percent. To understand how extraordinary that leap was, consider the fact that worker compensation grew by just 5.7 percent over those same three decades.

The rise of this new, celebrity CEO represented a profound change in corporate America—and one that was supposed to make things better. After all, those “faceless,” statesmanlike bureaucrats of the postwar era who presided over their firms with such autonomy didn’t actually own them. The rise of more active shareholders was meant to improve the performance of CEOs—and by some financial measures it did. I wish Mizruchi had made even more of his important finding that shareholder-value-driven CEOs became less civic-minded.

One reason that he doesn’t pursue these contradictions in the behavior of “the new chief executive officer” may have to do with one of the core conceits of his book, and its biggest weakness. Mizruchi insists on framing the changed relationship between U.S. business and the state as one of the declining power of the corporate elite. This is a group, he writes, that has lost its unity, its efficacy, and even its ability “to provide collective solutions to issues of concern to the business community.” Here, he is unconvincing. It is not at all clear that a business elite that has lost the ability to speak with one voice is necessarily less powerful—it is just less united and less conscientious.

Mizruchi is obliged to perform such excruciating mental gymnastics to present today’s corporate elite as losing out because of the way he ends his book—with a stirring call to action for the C-suite. He wants today’s CEOs to be inspired by the example of their postwar predecessors and to shoulder the burdens, including the tax burden, of a responsible business elite. “Although the window is closing, sufficient time remains for the American corporate community to assume a position of leadership and responsibility,” he concludes. “Some will claim that this plea is as utopian as Émile Durkheim’s dream of an orderly society or Karl Marx’s yearning for a communist nirvana. But the American corporate elite has provided leadership in the past. It is long past time for its members to exercise some enlightened self-interest in the present.”

Here’s the rub: What if the lack of efficacy and the fracturing of the American corporate elite that Mizruchi describes suits those elites perfectly well? In social encounters, I have never met an American corporate titan who didn’t describe himself as intensely conscious of, and intensely frustrated by, the fragmentation and the collective disempowerment Mizruchi describes. This is a group of hard-working meritocrats who all feel they could solve America’s problems in a week if given the authority, and each one is astonished and angered that the President doesn’t spend more time seeking his—there are very few hers—personal opinion.

But when it comes to his day job, every American CEO is laser-focused on his own paycheck, on his company’s share price, and on whatever financial measure his investors care about. He may worry about the deficit or the state of public education over cocktails at dusk, but by day he is working hard to minimize his company’s tax bill; he may serve on presidential commissions to create American jobs, but his own job is to make his own company more efficient, which means using machines instead of people and outsourcing to reduce labor costs.

Mizruchi lauds those he sees as exceptional CEOs, like Starbucks chief Howard Schultz, for swimming against the self-interested tide with socially responsible practices. Yet, as an investigation by Reuters revealed, virtuous Starbucks so adroitly arbitraged the European tax system that over 14 years it paid less than £9 million in taxes in the UK. The point is not that Schultz is a hypocrite. It is that, in an age of global markets, global labor, and global capital, even the most socially minded CEO can’t afford to indulge in the enlightened behavior of the greatest generation.

Mizruchi hopes America will be saved by “a group of corporate officials, speaking with one voice, able to bring together politicians from both major parties.” For a boomer, asking business leaders to be more civic-minded may feel like a thrillingly rebellious idea. And it is not a bad start. But as in our last great economic transformation, the Industrial Revolution, it is naive to expect business to come to heel voluntarily.

Just like the rest of us, CEOs want to be good. But all too often, the way global capitalism works requires them—if they are to serve their shareholders, keep their jobs, and, not incidentally, earn their vast paychecks—to do things that are bad for the rest of society, or at least part of it. We cannot rely on a change of heart. What we need is a change in incentives for corporate elites—new, stricter rules, more firmly imposed, for the game that they play. And putting that system in place is a job not for the elites but for the state and society—which means all of us.

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The perils of authoritarian overreach http://blogs.reuters.com/chrystia-freeland/2013/06/07/the-perils-of-authoritarian-overreach/ http://blogs.reuters.com/chrystia-freeland/2013/06/07/the-perils-of-authoritarian-overreach/#comments Fri, 07 Jun 2013 15:16:41 +0000 http://blogs.reuters.com/chrystia-freeland/?p=1981

The past week has been a lesson in the perils and the apparent inevitability of overreach. The most eye-catching example has been in Turkey, where what began as a few people protesting a planned shopping mall has burst into a mass revolt against the governing of Prime Minister Recep Tayyip Erdogan.

A second case, in Russia, has been on a much smaller scale but in some ways is even more menacing: Sergei Guriev, one of the country’s most respected economists and university leaders, has left the country, fearing arrest if he stayed.

What is striking about both episodes is how costly they are proving to be for the dominating leaders who have provoked them, and how easily it seems they might have been avoided.

Start with Turkey. All other things being equal, the government would prefer to build a luxury shopping mall in Taksim Square. But that objective obviously pales in comparison with the political damage being done to Erdogan by the escalating protests and the police crackdown.

Likewise in Russia, where President Vladimir V. Putin would prefer to discourage academics – and everyone else – from speaking in support of declared enemies of the state, like Mikhail Khodorkovsky, formerly Russia’s richest man, who is now serving time in prison. But it is clear that the criticism provoked by Guriev’s self-exile has far outweighed any benefit Putin might derive from silencing a critic.

This is where the peril of authoritarian overreach comes in, even for Erdogan, whose willingness to repress dissent has not reached the level of Putin.

“For Erdogan, this was a mistake,” Daron Acemoglu, a Turkish-born professor of economics at the Massachusetts Institute of Technology, told me. “Once you become prime minister, you have only yes-men surrounding you. You are more able to control power and to remove the checks and balances which exist. As that happens, the probability of mistakes increases.”

That is why a strong-willed leader can start out with good intentions – for example, to clean up corruption and inefficiency – but can be undermined by his own victories. Without the institutional restraints of a robust democracy and public criticism by a free media and the political opposition, such a leader eventually becomes a blinkered one, unconcerned with anyone’s opinions, and certain that he is always right.

Living in that echo chamber may be pleasant, but it can also make a leader prone to errors. Witness Erdogan’s dismissive initial reaction to the protesters, whom he described as “looters” and drunks, and whose numbers, he said, were trivial.

“If this is about holding meetings, if this is a social movement, where they gather 20, I will get up and gather 200,000 people,” the Turkish leader said in a televised speech. “Where they gather 100,000, I will bring together 1 million from my party.”

Those words may have had a nice ring to them, but their practical impact was to inflame the opposition.

The one source of criticism even the most repressive authoritarian leader cannot silence is the outside world. Autocrats are usually thin-skinned and like to be admired, so at least, at first, they often seek to be praised abroad.

Eventually, though, most authoritarian rulers will continue to tighten their control at home and not mind too much if that brings opprobrium from elsewhere.

“The degree to which the government does not care about what the West thinks is very unusual,” Guriev told me when I asked him why he had been forced abroad, given the negative publicity his departure provoked. “It looks like the political and economic reforms may be delayed indefinitely. In that sense, we are entering uncharted waters.”

If you believe in democracy, the overreach of leaders is a good reminder that vigorous public debate and time-consuming due process are not only more fair and more just, but that over the long term they usually produce better government, too.

But there is also a less uplifting lesson to draw from these episodes in Russia and Turkey: the impact of global capitalism on world democracy.

Western investment is usually assumed to walk hand-in-hand with the democratic values of its home countries, and indeed, opening an economy to outside money is one of the textbook steps in a shift from authoritarianism to an open society.

But when it comes to tough leaders who preside over economic growth – whether it is fueled by oil, as in Russia, or the classic emerging-market shift up the value chain, as in Turkey – investment dollars may not come with very many values attached. That is particularly likely to be true at moments like this one, when the markets are sloshing with money and are short of places to spend it.

“An authoritarian guy creating macro-stability in the short run can boost the economy for a while,” said Acemoglu, the MIT. professor. “There is probably more room for that because there is so much money in the world right now. I don’t think investors are going to shun Turkey. They are going to come back. They don’t have so many options.”

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Matriarchy, patriarchy and the masters of the universe http://blogs.reuters.com/chrystia-freeland/2013/05/31/matriarchy-patriarchy-and-the-masters-of-the-universe/ http://blogs.reuters.com/chrystia-freeland/2013/05/31/matriarchy-patriarchy-and-the-masters-of-the-universe/#comments Fri, 31 May 2013 19:39:19 +0000 http://blogs.reuters.com/chrystia-freeland/?p=1977

The past week has underscored one more way in which the lives of the super-rich are diverging from the lives of everyone else: The middle class is becoming a matriarchy, while the plutocracy remains firmly patriarchal.

The sexist mores of the super-rich were exposed by one of that tribe’s most prominent philanthropists, the hedge fund billionaire Paul Tudor Jones. At an April symposium at the University of Virginia, Jones said that women didn’t trade as successfully as men because becoming a mother is a “killer” to professional focus. “You will never see as many great women investors or traders as men – period, end of story,” he said.

“As soon as that baby’s lips touched that girl’s bosom, forget it,” Jones said, describing the grim career impact of motherhood on two women who had worked with him in the late 1970s.

“Every single investment idea,” he said, “every desire to understand what is going to make this go up or go down is going to be overwhelmed by the most beautiful experience which a man will never share about a mode of connection between that mother and that baby.”

When they were revealed by the Washington Post last Thursday, Jones’s remarks swiftly became notorious, partly because of the vivid language he used to make his case. And Jones duly apologized.

But his comments are the hedge fund version of the journalist Michael Kinsley’s definition of a gaffe – which Kinsley said occurred “when a politician tells the truth – some obvious truth he isn’t supposed to say.”

In Jones’s case, the forbidden truth is not some mysterious mental property of oxytocin, the hormone produced by nursing mothers. It is instead the striking fact that at the summits of high finance, where many of the greatest fortunes in this new Gilded Age are being amassed, there are no women, and it is commonplace to believe, as Jones does, that there will never be any.

Contrast that positively Victorian setup with the latest news from Middle America: This week, the Pew Research Center reported that four in 10 families with children under the age of 18 are now headed by women who are the sole or primary breadwinners. Motherhood may be a “killer” when it comes to becoming a Master of the Universe, but among middle-class mothers, even after that touch of baby’s lips to bosom, a big and growing number find themselves able – and often required – to bring home the family bacon.

It is remarkable how profound the shift has been: In 1960 just 11 percent of all households with children under 18 included mothers who were either the sole or primary source of income for the family.

One of the changes, of course, is the feminist revolution, and all of us, particularly breadwinning mothers like me, should celebrate the liberation of half of the human race and our increasing social and political permission to fully participate in the economy.

But, particularly when you bear in mind how very different the world looks at the high altitudes occupied by Jones and his peers, it is also worth noting that Betty Friedan is not the only reason so many women are contributing so much more to their household budgets. Another, less uplifting, driver is the hollowing out of the middle class.

As middle-class wages have stagnated, mothers have gone to work in increasing numbers to maintain their families’ standard of living. The Pew survey found that two-career households exacted a personal toll – 74 percent of adults said the increasing number of mothers working outside the home had made it harder to raise children, and half said it had put a strain on marriages. But a strong majority – two-thirds – said that working mothers had made it easier for their families to live comfortably.

The 2008 recession intensified these trends. In 2007, just 20 percent of mothers said their ideal was to work full-time. By 2012, that figure had swollen by more than half, to 32 percent. Moreover, in 2007, 29 percent of mothers said they would prefer not to work at all. By 2012, just 20 percent said that was their ideal.

These deep changes in how the middle class lives are one reason the backlash against Jones’s remarks was so fast and furious: The world he described is as inconceivable to most of us as Soviet Communism is to my school-age children. It is tempting to delight in that difference: Plutocratic chauvinism growing red-faced when exposed to the gender egalitarianism of the 99 percent.

But the gender divide between the plutocrats and everyone else is more a cause for worry than for celebration. As income inequality increases, the social and political sway of those at the very, very top grows, too. They are nearly all men, and men whose lived experience tells them that women, for whatever reason, just don’t have what it takes.

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Some cracks in the technocrat cult http://blogs.reuters.com/chrystia-freeland/2013/05/23/some-cracks-in-the-technocrat-cult/ http://blogs.reuters.com/chrystia-freeland/2013/05/23/some-cracks-in-the-technocrat-cult/#comments Thu, 23 May 2013 21:05:02 +0000 http://blogs.reuters.com/chrystia-freeland/?p=1972

We are living in the age of the technocrats. In business, Big Data, and the Big Brains who can parse it, rule. In government, the technocrats are on top, too. From Washington to Frankfurt to Rome, technocrats have stepped in where politicians feared to tread, rescuing economies, or at least propping them up, in the process.

Technocrats are in vogue within the intelligentsia, too. It is well nigh impossible to pick up a book about any social or political issue nowadays (including, I hasten to admit, my own) without coming across some data-heavy social science research. And the familiar pleas for common sense and a centrist approach, free from the taint of ideology, usually boil down to a call to put the technocrats in charge.

Technocrats have a lot to recommend them. We do, after all, live in the age of Big Data, and ignoring it or not being able to use it is a sure path to either bankruptcy or humiliation – witness the data jock extraordinaire Nate Silver and his legendary smackdowns of columnists who rely on anecdote and intuition.

But, particularly in the wake of 2008, a global crisis that technocrats both helped cause and failed to predict, there are also sound reasons not to rely mechanically on technocratic solutions. That’s why it is worth reading a new paper by Daron Acemoglu of the Massachusetts Institute of Technology and James Robinson of Harvard University.

In their seminal 2012 book, “Why Nations Fail,” Acemoglu and Robinson offered a powerful new framework for understanding why some societies thrive and others decline – those based on inclusive growth succeed, while those where growth is extractive wither.

Their new study, “Economics Versus Politics: Pitfalls of Policy Advice,” will be published later this year in the Journal of Economic Perspectives and is available now in draft form as a National Bureau of Economic Research working paper. It tackles an essential subject in the age of technocracy: the limits of technocratic thinking as a basis for policy.

Their critique is not the standard technocrat’s lament that wise policy is, alas, politically impossible to implement. Instead, their concern is that policy which is eminently sensible in theory can fail in practice because of its unintended political consequences.

In particular, they believe we need to be cautious about “good” economic policies that have the side effect of either reinforcing already dominant groups or weakening already frail ones.

“You should apply double caution when it comes to policies which will strengthen already powerful groups,” Acemoglu told me. “The central starting point is a certain suspicion of elites. You really cannot trust the elites when they are totally in charge of policy.”

An example discussed in the paper – and an issue on which Acemoglu changed his own mind in the course of writing it – is the role of trade unions.

“My view for a long time was that labor organizations had become rent-seeking,” he said, using the economics term for groups that specialize in getting a bigger share of the pie rather than making it grow overall.

“Now, my view is that, even though we are not transitioning from dictatorship to democracy, you need some labor organizations as a counterweight to business lobbying.”

Acemoglu and Robinson make the argument at greater length in the paper: “Faced with a trade union exercising monopoly power and raising the wages of its members, most economists would advocate removing or limiting the union’s ability to exercise this monopoly power, and that is certainly the right policy in some circumstances. But unions do not just influence the way the labor market functions; they also have important implications for the political system. Historically, unions have played a key role in the creation of democracy in many parts of the world, particularly in Western Europe.”

Two other important examples the study dissects are financial deregulation in the United States and privatization in post-Soviet Russia. In both cases, economic reforms that made a lot of sense in the abstract and in terms of economic efficiency had the unintended consequence of strengthening already powerful political interests.

As the powerful often do, they overplayed their hand. The result was a political spiral which in the United States helped set off the 2008 financial crisis and in Russia led to the rise of President Vladimir V. Putin and his authoritarian regime.

This paper reminds us of something important, which critics of the elite often don’t understand or don’t want to understand. In both the United States and in Russia, the reforms which strengthened powerful vested interests didn’t begin as a cunning plot by a wealthy cabal, intent on further enriching itself. Instead, they were endorsed and advocated by today’s high priests, the technocrats, who sincerely believed they were acting in the common good.

“What our paper is targeted at is, there is a certain hubristic attitude among economists – we are the queen of the social sciences because we use numbers and data,” said Acemoglu, who is a professor in MIT’s department of economics. “But that can ignore the implications of political power.”

That reminded me of a Russian oligarch who once told me he had been prepared to pay a bribe to influence the privatization process in his favor. But, he delightedly recalled, he soon discovered that all he needed to do was explain that the policy would further the cause of market reforms in Russia. Then, as he put it, “like little darlings,” the technocrats in charge hastened to put it into action.

That’s the big takeaway from the Acemoglu and Robinson paper: There is no such thing as pure policy, and we should check our pockets and lock our doors when someone tells us otherwise.

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Does inequality help growth- or hurt it? http://blogs.reuters.com/chrystia-freeland/2013/05/16/does-inequality-help-growth-or-hurt-it/ http://blogs.reuters.com/chrystia-freeland/2013/05/16/does-inequality-help-growth-or-hurt-it/#comments Thu, 16 May 2013 20:56:14 +0000 http://blogs.reuters.com/chrystia-freeland/?p=1968

One of the most urgent questions in economics today is the connection between inequality and growth. That is because one of the big economic facts of our time is the surge in income disparity, particularly between those at the very top and everyone else. The other big fact is the recession set off by the financial crisis and the consequent imperative to jump-start economic growth. Figuring out the relationship between these two tent-pole issues is therefore a good way for economists to spend their time.

There are two main and contradictory ideas about how that relationship might work. One is that inequality is the price of robust economic growth. If the private sector is thriving, the most successful capitalists will be getting very rich. Creating a system that allows – indeed, encourages – the best and the brightest to pull away from everyone else is how you shift your economy into its highest gear.

There is, however, another theory, and it has been winning adherents in the aftermath of the financial crisis. In this view, rising inequality is not a symptom of a fast-growing economy or an incentive that will help create one. Instead, too much income inequality crushes economic growth.

There are different arguments for why that might happen. One is that high income inequality creates an unstable system that is vulnerable to costly booms and busts. Another is that when too much of the income goes to the very top and not enough goes to the middle, spending slumps – how many yachts does a plutocrat need? – putting a brake on growth.

David Howell, a professor of economics at The New School in New York, has written a draft paper for the Center for American Progress, a progressive research group, that investigates the first argument. Howell argues that the United States and Britain have acted over the past three decades on what he calls the laissez-faire theory, that the equation of rising inequality and increasing gross domestic product is correct.

As Howell puts it, “the laissez-faire case for high inequality is grounded in the belief that growth in output and employment depends mainly on strong incentives to work and invest.”

Howell tested that view by comparing the United States and Britain to their peers. He asked whether “compared to other rich countries, U.S. income inequality has paid off in relatively high growth.” His answer: not particularly. He finds that “there is no simple correlation between our measures of growth and income inequality.”

That may come as a surprise to many Americans, who are accustomed to hearing, as Howell explained, “that the U.S. middle class is doing relatively well, at least compared to Europe, because of productivity growth and because we allow higher inequality.”

But the reality is that at least some of those allegedly sclerotic European economies, dragged down by their highly redistributive welfare states, have outperformed the United States.

“What we see is Sweden having really good productivity growth by all measures, despite much more modest increases in inequality and starting at a much lower level,” he said.

“The U.S. is anywhere from an O.K. to middling performer in the Age of Inequality,” Howell said, using his term for our era. But while his work suggests inequality is not needed to get growth, he does not show that inequality actually hurts growth either: “I don’t show a strong measurable inverse effect.”

Lars Osberg, an economist at Dalhousie University in Nova Scotia, takes on this second argument – the case that inequality, at least beyond a certain point, can stifle growth.

He, too, adopts a comparative lens, looking at Canada, the United States and Mexico.

Osberg argues that a growing chasm between those at the very top and everyone else imperils the overall economy. His worry is financial instability.

“The added savings of the increasingly affluent must be loaned to balance total current expenditure,” he writes, “but increasing indebtedness implies financial fragility, periodic financial crises, greater volatility of aggregate income and, as governments respond to mass unemployment with countercyclical fiscal policies, a compounding instability of public finances.”

This is a variation of an argument by Raghuram Rajan, a politically center-right professor at the University of Chicago, who has suggested that rising income inequality was one of the drivers of the financial crisis. As income inequality increased, and the incomes of the middle class stagnated, the U.S. government responded by increasing the consumer credit available to the middle class.

In the short term, that was a win-win solution: consumption, and therefore the economy, grew, and the middle class was quiescent because stagnating incomes were masked by increasing consumer debt. But in the medium term that Goldilocks scenario broke down – the middle class consumption bubble, and the Wall Street bubble it helped finance, popped with devastating consequences.

Both Howell and Osberg are skeptical, at best, of the value of rising income inequality as a driver of economic growth. When you put that conclusion together with the arithmetic of democracy – rising income inequality means a majority of voters are on the losing end of the deal – a political backlash seems inevitable.

“Go back to the 1920s or the 1870s and economists were worried about the stability of the capitalist system,” Osberg said. “One of the things the 1930s experience teaches us is there are some catastrophic outcomes which can happen.”

The investing class and the academic world are focused on those dangers. “Can capitalism survive?” is one of the trendiest conference topics among red-blooded capitalists and left-leaning professors alike. So far, at the ballot box and on the street, this question has not been as salient. That does not mean it will not be in the future – and in ways we cannot predict.

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Poor little rich kids http://blogs.reuters.com/chrystia-freeland/2013/05/09/poor-little-rich-kids/ http://blogs.reuters.com/chrystia-freeland/2013/05/09/poor-little-rich-kids/#comments Thu, 09 May 2013 19:51:03 +0000 http://blogs.reuters.com/chrystia-freeland/?p=1964

If you doubt that we live in a winner-take-all economy and that education is the trump card, consider the vast amounts the affluent spend to teach their offspring. We see it anecdotally in the soaring fees for private schools, private lessons and private tutors, many of them targeted at the pre-school set. And recent academic research has confirmed what many of us overhear at the school gates or read on mommy blogs.

This power spending on the children of the economic elite is usually — and rightly — cited as further evidence of the dangers of rising income inequality. Whatever your views about income inequality among the parents, inherited privilege is inimical to the promise of equal opportunity, which is central to the social compact in Western democracies.

But it may be that the less lavishly educated children lower down the income distribution aren’t the only losers. Being groomed for the winner-take-all economy starting in nursery school turns out to exact a toll on the children at the top, too.

First, the data on parental spending on education. There is a lively debate among politicians and professors about whether the economy is becoming more polarized and about the importance of education. Dismissing the value of a college education is one of the more popular clever-sounding contrarian ideas of the moment. And there are still a few die-hards who play down the social significance of rising income inequality.

When you translate these abstract arguments into the practical choices we make in our personal lives, however, the intellectual disagreements melt away. We are all spending a lot more money to educate our kids, and the richest have stepped up their spending more than everyone else.

In “Investing in Children: Changes in Parental Spending on Children, 1972–2007,” a study published this year in the journal Demography, the researchers Sabino Kornrich and Frank F. Furstenberg found that spending on children grew over the past four decades and that it became more unequal. “Our findings also show that investment grew more unequal over the study period: parents near the top of the income distribution spent more in real dollars near the end of the 2000s than in the early 1970s, and the gap in spending between rich and poor grew.”

Dr. Kornrich and Dr. Furstenberg warn that social mobility is in jeopardy. “In the race to the top, higher-income children are at an ever greater advantage because their parents can and do spend more on child care, preschool, and the growing costs of postsecondary education,” they write. “Thus, contemporary increases in inequality may lead to even greater increases in inequality in the future as advantage and disadvantage are passed across the generations through investment.”

They are right to worry. But it turns out that the children being primed for that race to the top from preschool onward aren’t in such great shape, either.

That is the conclusion of research by Suniya S. Luthar, professor of psychology and education at Columbia University’s Teachers College. Dr. Luthar stumbled upon the subject of troubled rich kids. “I was looking for a comparison group for the inner-city kids,” Dr. Luthar told me. “And we happened to find that substance use, depression and anxiety, particularly among the girls, were much higher than among inner-city kids.”

That accidental discovery set Dr. Luthar on a research path that has prompted her to conclude that the children of privilege are an “at-risk” group. “What we are finding again and again, in upper-middle-class school districts, is the proportion who are struggling are significantly higher than in normative samples,” she said. “Upper-middle-class kids are an at-risk group.”

Dr. Luthar’s findings are directly connected to the stepped-up spending on children’s education at the top that Dr. Kornrich and Dr. Furstenberg document. The title of the paper she is finishing, due to be published in the autumn, is “I Can, Therefore I Must: Fragility in the Upper Middle Class,” and it describes a world in which the opportunities, and therefore the demands, for upper-middle-class children are infinite.

“It is an endless cycle, starting from kindergarten,” Dr. Luthar said. “The difficulty is that you have these enrichment activities. It is almost as if, if you have the opportunity, you must avail yourself of it. The pressure is enormous.”

It can be tempting, particularly if you don’t happen to be raising children in one of the hothouse communities Dr. Luthar studies, to dismiss this hyper-education as a frivolous, albeit painful, form of conspicuous consumption, like cosmetic surgery or flashy cars. But the truth is that these parents and children are responding rationally to a hyper-competitive world economy.

“These are kids whose parents value upward mobility,” Dr. Luthar said. “When we talk to youngsters now, when they set goals for themselves, they want to match up to at least what their parents have achieved, and that is harder to do.”

It turns out that our children are feeling the same paradoxical strains of the 21st century we all are. Increasingly, we live in individualistic democracies whose credo is that anyone can be a winner if she tries. But we are also subject to increasingly fierce winner-take-all forces, which means the winners’ circle is ever smaller, and the value of winning is ever higher.

Dr. Luthar says the children she studies fear the price of losing would be psychic as well as economic — “What happens to me if I fall behind? I’ll be worth nothing.” In an age when more and more of the middle class is falling behind, no wonder they — and their parents — are at risk.

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Business, taxes and responsibility http://blogs.reuters.com/chrystia-freeland/2013/05/03/business-taxes-and-responsibility/ http://blogs.reuters.com/chrystia-freeland/2013/05/03/business-taxes-and-responsibility/#comments Fri, 03 May 2013 16:13:51 +0000 http://blogs.reuters.com/chrystia-freeland/?p=1961

In recent months, people and their politicians around the world have been astonished to learn that big companies and billionaires will go to extraordinary lengths to pay lower taxes.

Thanks to the work of the International Consortium of Investigative Journalists, based in Washington, we have discovered that some of the most prominent public figures in the world have banked their fortunes in international tax havens, beyond the scrutiny of their national treasuries.

Meanwhile, Tom Bergin, my Reuters colleague, has become the scourge of the top U.S. multinationals by revealing their low effective tax rate in Britain. Mr. Bergin has found that between 1998 and 2012, Starbucks paid less than 9 million pounds, or about $14 million, in British taxes while registering sales of more than 3 billion pounds. According to statutory filings, Google made $18 billion in revenue in Britain from 2006 to 2011, and paid just $16 million in taxes.

Open the door to the top executives’ suite and you will hear howls of rage over the backlash these revelations have provoked. There is, from the corporate point of view, something a little disingenuous happening here. After all, countries, states and cities have spent the past several decades openly competing to set the lowest corporate tax rates in an effort to attract business. The fact that multinationals would respond to these incentives and turbocharge them with some international tax arbitrage is about as shocking as the discovery of gambling in Casablanca.

After all, as Lord Clyde observed, in a 1929 British tax case: “No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores.”

This principle – that you should seek to make the most money you can, provided you do not break the law – is the operating software of modern capitalism. As Milton Friedman put it: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

In the hypercompetitive 21st century, where every Apple is only one algorithm away from becoming a BlackBerry, paying the lowest possible taxes is not the exceptional policy of one particularly greedy chief executive – it is what every executive seeks to do to keep his job. That was what Andrew Kassoy, a former private equity investor, explained at a recent panel discussion at the Stern School of Business at New York University (Disclosure alert: I was the moderator).

Kassoy, who now leads a nongovernmental organization working to transform corporate behavior, argued that current publicly traded U.S. companies were “actually obliged to maximize their externalities” – economist-speak for behavior that harms the wider community – if that would increase their bottom line. Kassoy does not think that is a good thing, and, increasingly, neither do a lot of other people – the grim title of the session was “Can American Capitalism be Saved?”

He’s not the only one who is worried. In a recent interview, I asked Mark Carney, the governor of the Bank of Canada, about the ability of rich people and big companies to avoid taxes in a world of global capital flows.

“It is demonstrably a problem,” said Carney, who will take over as the governor of the Bank of England on July 1. “If there’s an ability to fundamentally, whether on a personal or a corporate level, persistently avoid tax, the consequence of that is that the burden of fiscal adjustments that are happening in virtually every advanced economy falls more heavily on those who pay their fair share. And they end up paying more than their fair share as a consequence.”

Closing the tax loopholes or tightening the lax tax enforcement that have deprived European treasuries of so much multinational corporate tax revenue is politically difficult and technically complicated. But what is even harder is figuring out how to better align the behaviors of the business titans with the greater good of the community as a whole.

After all, the companies that have been minimizing their European tax bills are ones we are accustomed to thinking of as the good guys. These are not the bailed-out fat cats of Wall Street or the crony capitalists of the emerging markets. These are the inventive entrepreneurs of the West Coast, who brought cappuccinos and search capabilities to the global masses. Starbucks energetically associates its brand with all manner of ethical causes, and Google’s motto is “Don’t be evil.”

In a new book, a University of Michigan business professor, Mark S. Mizruchi, contends that the forsaking of responsibility for the wider community is a big shift in the behavior of U.S. business and a central reason for the country’s political and economic malaise.

“The current American corporate elite seems to be leading us toward the fate of the earlier Roman, Dutch and Hapsburg Spanish empires, starving the treasury and accumulating vast resources for itself,” Mizruchi writes. He concludes his book with the hope that the corporate elite will rediscover “enlightened self-interest” and reform themselves.

Speaking at the New York University conference, Clay Christensen, one of the leading thinkers about the disruptive impact of the technology revolution, suggested that belief in a God who holds us accountable in the afterlife would make captains of industry more civically responsible today.

Christensen is right that to change behaviors we need to change incentives. Hellfire and damnation is one option; another is rewriting the rules of engagement between companies, countries and shareholders.

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