The Great Debate

The growing Foxconnification of the workforce

Regina Joseph

Feb 9, 2012 16:26 EST

Without yielding to irrational 2012 Mayan apocalypse theories, can we claim mass suicide now as a bellwether of 21st century free-market economics?

Last month, the spectacle of dozens of Chinese electronics workers gathered on the roof of a factory dormitory in Wuhan and threatening to jump en masse if management did not adhere to their wage promises seemed as extreme as it was troubling. Yet it was shrugged off by many Western observers as exemplary of the outer limits inherent in China’s colossal drive to create an urban middle class from the hundreds of millions of rural poor.

Contrast that with last week’s federal lawsuit raised by an American of Chinese descent, Xuedan Wang, against the Hearst Corporation: Wang, a 28-year-old college graduate who toiled as an unpaid intern at Harper’s Bazaar magazine, alleges the company violated U.S. labor laws by refusing to conform to wage and hour rules (full disclosure: I work for a few companies who hire unpaid interns). Her hopes of turning the suit into class-action litigation dovetails with a torrent of emerging similar claims over companies and institutions increasingly exploiting young people as an unpaid labor force.

At first you may assume the cases are incompatible as lodestars of our interdependent global economic predicament: How can one really compare the luxury problem of a middle-class American fashionista to the travails of aspirant blue-collar laborers in China?

Yet their quandaries are bound up in a larger economic phenomenon I call Foxconnification (so-named after Foxconn, the notorious electronics manufacturing subsidiary of Taiwan’s Hon Hai Precision Industry Company Ltd, which supplies Apple’s iPhones and iPads and whose work demands provoked not just the aforementioned threatened mass suicide but also several independent suicides): the individual tendency toward willful self-enslavement in order to survive a harsh labor market.

The “freedoms” promised by globalization and technology are, to a degree, illusory. Yes, you may now immediately gratify your need to observe news in real time, or contact and do business with anyone almost anywhere, or just watch kittens wear goofy hats. But a macro consequence of worldwide commercial linkage suggests a trap. When so many countries plug into an international trade system that drives information- and service-led growth in advanced countries and pushes manufacturing and industry in emerging nations, where labor is cheaper, workers will progressively be forced to make ever larger tradeoffs to survive, including compromising on their health and safety, as well as the payment reward for their labor.

This is hardly a neo-Marxist critique. Even though workers in China are steadily familiarizing themselves with and demanding the trappings of Western-style middle-class consumerism, they have to put up with brutal conditions to achieve them — working environments that tantalize employees with the promise of upward social mobility only to grind them down until death seems the preferable option. China is not alone in building its middle class through vicious employment structures, of course; individuals in such countries as India, Peru, Brazil and Thailand, for example, must make the same fateful job calculus. Furthermore, Chinese observers claim that Foxconn’s setting is a definitive improvement on that of other, smaller manufacturers, as well as on the circumstances of rural poverty that drive eager citizens to continue taking these jobs in spite of what they know.

The fast track to a balanced budget

Howell E. Jackson

Feb 8, 2012 10:46 EST

The state of the union, fiscally speaking, is perilous. Despite record deficits and dire warnings from Europe as to the consequences of sustained fiscal imbalance, our leaders have been unable to find common ground. The Simpson-Bowles Commission in 2010, the Gang of Six last summer and the misnamed Super Committee of this past fall were all bipartisan efforts to cut through the Gordian knot of budgetary gridlock. And all of them failed. Miserably.

Yet despite these failures, Congress now has the opportunity to move us onto a path toward prompt national consensus on fiscal reform. Congressional leaders are this week debating legislation to extend the payroll tax cut. If they are smart, they will include in that bill a small, but important, provision that grants the winner of the 2012 presidential election something called fast-track authority. This authority would allow the president — whoever he is — to submit fiscal reform legislation for an up-or-down vote in both the House and Senate on Jan. 21, 2013, the day after Inauguration Day. Indeed, fast-track authority would be a worthy quid pro quo for members of Congress reluctant to sign off on extending the payroll tax cut without some assurance of future progress on deficit reduction.

What’s promising about this proposal is not just what fast-track authority might deliver in 2013, but what its very existence could do to the presidential race. With fast-track authority granted, President Obama and his Republican challenger could each be expected to put forward during the presidential race a coherent and credible plan to move toward a balanced budget.

Fast-track authority is not unique to budget debates. It has a long history on Capitol Hill, and gives legislation a prompt and clean vote in both chambers. It thus circumvents the Senate filibuster and procedural maneuverings in the House that can block legislation. In the recent past, fast-track authority has facilitated congressional approval of international trade deals and military base closings — public policy challenges where there was agreement that national action was needed but vested interests were using congressional procedures to inhibit progress.

Our public finances present just this kind of problem. Both sides of the aisle agree that we need to return to a path of fiscal balance. But entrenched interests – on both the left and the right – stymie any sort of balanced package of entitlement reforms and revenue enhancements with procedural roadblocks.  The only way forward is to change the rules of the game.

Here’s how fast-track authority could work in the context of a presidential election campaign:

How the Industrial Revolution created modern debt

Philip Coggan

Feb 7, 2012 14:08 EST

This is an excerpt from Paper Promises: Debt, Money and the New World Order, published this week by PublicAffairs.

Consumers have always borrowed money from friends, neighbors and relatives. Merchants would not exist without credit; the habit of making debts on a “slate” in the local butcher or greengrocer was still common in the middle of the twentieth century. But the local merchant would normally offer credit only to a known, local customer; serial defaulters, or those deemed to be untrustworthy, would be refused business. In David Copperfield, Mr. Micawber’s failure to repay merchants required him to cadge off his friends.

But the modern idea of widespread consumer credit (in the form of national lenders, credit cards, etc.) really dates to the Industrial Age. A peasant’s income is unlikely to grow over the long term; at best, it will be highly variable, with bumper harvests in good years giving the peasant sufficient income to pay off debt incurred in bad years. But two or three bad harvests in a row could be ruinous.

This point illustrates a wider truth. The granting of a loan requires both the creditor and the debtor to be confident that the latter’s income will grow sufficiently to repay the debt. Think of a retailer that sells a washing machine, or television, in installments. Clearly the customer does not have the money now; otherwise he or she would pay upfront. Moreover, the overall bill, including interest, will be greater than the cash price. So the debtor must be confident that he will stay in employment to pay the larger sum. In addition, he or she will probably be confident that their future income will rise so as to offset the additional interest. A growing economy makes that calculation all the more likely. The Industrial Revolution changed the pattern of human civilization. It allowed economic growth to expand at a much faster rate than ever seen before. This was probably down to the use of carbon-based fuels (wood, coal and, eventually, oil) to power technologies to replace human and animal labor. This resulted in a substantial increase in productivity.

Think of an economy as a business with inputs and outputs. An agrarian economy is often dubbed a subsistence economy; it takes all the energy of the workers (and their livestock) to produce the food necessary to live. A bull may plow a field, and reduce the effort of the farmer, but it takes a lot of land to feed the bull. The economy (business) does not produce a profit. Carbon-fuelled machines transform the situation. Initially, man naturally exploited those fuels that were easiest to reach; chopping down trees, getting coal nearest the surface and so on. So the output, in terms of goods and energy produced, was much greater than the effort put in.

The movement of people from the land to the new industrial cities also required an agrarian revolution. Those remaining on the land had now to produce a surplus, enough to feed the industrial workers as well as themselves. Fortunately, this happened, thanks to the consolidation of smallholdings, new farm machinery, crop rotation and a host of other small reforms. In turn, these improvements allowed the population to grow.

So we now had economic growth and population growth. The next stage emerged as workers gathered in factories. Initially, the conditions were terrible – long hours, low pay (albeit better than a farm laborer’s income) and non-existent safety standards. In the crowded towns, sanitation was poor, disease spread quickly and life expectancy was severely restricted. But factories made a big difference in that they grouped workers together and made it easier for them to organize in their own interest. That was very difficult for geographically dispersed agricultural workers. Steadily over the nineteenth century, trade unions grew in membership and workers flexed their muscles through strikes. Governments started to recognize their power and buy them off. Bismarck, a hard-headed pragmatist, introduced old-age pensions in Germany as a way of recruiting worker support for the Hohenzollern monarchy.

Subsidizing people instead of corporations

John Stoehr

Feb 3, 2012 12:14 EST

Reaganomics is so well established that state officials, both Republican and Democratic, don’t call it that anymore. They simply call it smart policy.

Even so, the idea of boosting supply to raise demand, instead of the other way around, is hardly uncontroversial. States spend billions annually on economic development subsidies to try and create jobs. But recent evidence suggests tax breaks, “forgivable loans,” and the like don’t work as well as hoped.

Up to now the thinking went like this: Devoting public funds to pull companies into the state will eventually yield returns, which is to say, yield jobs. Those jobs stimulate spending, which raises demand for the very products and services of the corporation that brought the jobs in the first place. And thus the virtuous cycle is sent into overdrive. That, at least, has been the theory.

But let’s entertain another theory. What if we took those same billions and reversed the equation? That is, what if we just gave the money away. We know what people would do with it. They’d spend it. Consider the efficacy of unemployment checks. Every dollar spent on unemployment checks saw $1.61 in return, according to a 2010 report by Moody’s Analytics. It’s safe to say the same would happen if you gave those billions away.

Which brings us back to a bizarro version of our virtuous cycle. Giving away the money might raise demand, which would increase job creation, which would lead to more demand. Theoretically speaking, that strategy could do more to revive states’ zombie economies than would giving tax dollars to private interests.

So, give the money we were going to give to the corporations to the people! I know, I know. It sounds crazy — and a little immoral. After all, we Americans feel there is something wrong with giving money to people who haven’t earned it. It undermines one of our defining national narratives: that anyone can succeed in the land of opportunity. All you have to do is work for it.

The flip-side of that belief is that giving money to corporations — in the form of tax breaks, “forgivable loans,” etc. — is morally justifiable, because they are investing the money. They’re taking the risk. Sure, they might profit a little, but that’s all right as long as profit leads to growth and shared prosperity.

How the West should treat ‘honor’ killings

Nicole Pope

Feb 3, 2012 11:45 EST

It took the jury in Kingston, Ontario some 15 hours to return a guilty verdict against three members of the Afghan-Canadian Shafia family in a case that shocked Canada and North America. Mohammad Shafia, 58, his wife Tooba Yahya, 42, and their 21-year-old son, Hamed, were sentenced to life imprisonment on Jan. 29 for the premeditated killing in 2009 of the couple’s three teenage daughters, Zainab, 19, Sahar, 17, and Geeti, 13, and that of Mohammad Shafia’s first wife, Rona Amir Mohammad. The Shafia girls wanted to live like ordinary Canadian teenagers, but their father viewed this lifestyle as a violation of his own interpretation of “honor.”

Honor-related crimes, often wrongly labeled an Islamic practice, take place in patriarchal communities where gender roles remain strictly divided and the interests of the community prevail over those of individuals, particularly women. A radical interpretation of Islam does at times provide religious cover for violence against women, and many of the 5,000 honor killings committed each year, according to United Nations estimates, take place in Muslim countries. But such practices persist in Sikh and Hindu communities as well, and only a few decades ago, crimes were still committed in the name of honor in Mediterranean countries like Italy, Spain and Greece.

In patriarchal communities, women are seen to embody the family’s honor, and thus are expected to be modest and obedient. But if honor-based violence goes back to the dawn of time in some parts of the world, tradition today often blends with modern factors — social, political or even economic — to create a potent, and at times lethal, mix. The murders that hit the headlines occur against a broader backdrop of honor-inspired coercion and domestic abuse. Identifying the warning signs and taking appropriate steps in time can protect lives. The Shafia girls, it appears, had reached out for help on several occasions, only to retreat when the authorities interviewed them in front of their parents.

Canada and North America are just beginning to identify and address honor-based crimes as specific forms of violence that require targeted policies, while European countries embarked on this learning curve in the past 15 years, collecting data and consulting with members of migrant communities to improve policies. The murder of Pela Atroshi in 1999 presented a major judicial challenge for Sweden: The 19-year-old was killed in Iraqi Kurdistan, where her family came from, but the crime had been planned by relatives living in Sweden and Australia. Determined prosecutors were able to bring a case against two of the perpetrators in Sweden, based on the testimony of the victim’s sister. In 2003, a British court imposed the first life sentence for an honor killing on Abdullah Yones, who, like Mohammad Shafia, killed his teenage daughter, 16-year-old Heshu. The case prompted the Metropolitan Police to set up a special department and order a review of dozens of homicides that had remained unsolved in the previous decade. In Germany, the murder in 2005 of a 25-year-old Turkish mother, Hatun Sürücü, which led to the arrest and trial of her brothers, also proved to be a turning point in the legal and social understanding of such crimes.

Identifying the patterns that may lead to honor killings is important for law enforcement and prevention purposes. Honor-related crimes differ from intimate-partner violence in that they are often organized and involve several of the victim’s relatives. They occupy the extreme end of a broad spectrum of patriarchal violence against women, a universal scourge that takes many forms worldwide.

But when individual murders committed in the name of honor are used to push an anti-immigration agenda or tar an entire culture or religion, they only serve to undermine the work of women’s rights activists who seek to challenge patriarchal prejudices from within these communities. If awareness of harmful practices against women has increased, it is largely through efforts of local activists in countries, or in migrant communities in the West, where honor killings take place. Westerners are not the only ones repelled by these brutal crimes.

Today, some commentators see the recent Canadian case as a sign that multiculturalism has failed. Allowing the likes of Mohammad Shafia to define norms for an entire nation or religious community ignores the common roots shared by perpetrators and victims: The latter are often equally proud of their ethnic, cultural or religious identity, but unlike their abusers or murderers, they focus on its positive aspects and merge them with the host culture.

The next emerging market: A billion women

Claudia Parsons

Feb 2, 2012 14:18 EST

You would never dream of not investing in India. You would never dream of not investing in China. So why wouldn’t you invest in women? That question was posed by Beth Brooke of Ernst & Young at the launch on Wednesday of a campaign called The Third Billion that aims to empower women as a means to drive economic growth. The campaign is based on the notion that there are a billion women not participating in the global economy who should be.

“Every country, every company in the world is looking for growth wherever they can find it,” Brooke said at a panel discussion (which I moderated) at Thomson Reuters headquarters in New York. “Where is the growth coming from? It’s coming from the emerging markets … We historically think of those emerging markets as India and China and many others. But it is clear that women are an emerging market.”

DeAnne Aguirre, senior vice-president at Booz & Company, said the concept of the “Third Billion” comes from the notion that if China and India each represent 1 billion emerging participants in the global marketplace, then a third billion is made up of women around the world whose economic lives have been “stunted, underleveraged or suppressed.”

The figure is based on a Booz & Company analysis of International Labor Organization data on women in the global workforce that showed some 860 million women were excluded for one reason or another, a number forecast to rise to 1 billion in the next decade. (Many of those women are in India and China, of course, so there is overlap with the first and second billions.)

La Pietra Coalition, the global alliance behind the campaign, has identified five factors that contribute to keeping women from playing a more productive role: access to finance; legal and social status; barriers to entrepreneurship; lack of education and training; and labor policy and practice.

The group wants to bring together corporations, governments, NGOs and institutions such as the World Bank to address each of those issues.

Among those that have already partnered with La Pietra are Coca Cola, Wal-Mart, Goldman Sachs and Standard Chartered Bank. Brooke, who is global vice-chair for public policy at Ernst & Young, said a key goal of the campaign is to enlist more big companies.

Quantifying the damage of the rush to quantify

David Callahan

Feb 2, 2012 11:50 EST

It was unsurprising to hear, as we did Tuesday, that Claremont McKenna College had lied about its students’ SAT scores to boost its position in the U.S. News & World Report annual ranking of colleges. University officials are famously obsessed with these rankings, and this is not the first time that a school has admitted fudging data. Just last year, Villanova Law School said that it had given false information to U.S. News.

Today we quantify and rank the performance of people and institutions as never before – all in pursuit, supposedly, of better outcomes and greater efficiency. Yet this obsession with metrics, a hallmark of the free-market ideology, invariably creates more incentives to cheat.

University presidents fret endlessly about the U.S. News rankings because they can have dramatic effects on everything from the quality of student applicants to the ability of schools to attract faculty and raise money. In an earlier era, one free of U.S. News, schools would not have had much reason to lie about SAT scores or admission rates. But now, with these numbers seen as hugely important, you can understand the temptation to monkey around with the reported data.

It’s not just colleges. Metrics have also taken over our K-12 schools, and they’re worse off for it. The education world has been roiled by major scandals recently in which administrators and teachers have been found to have manipulated student scores on standardized tests. These have not been isolated incidents, with revelations of false reporting in Atlanta, Chicago, Washington, Birmingham, New York City and Los Angeles.

It’s no secret why so many teachers and administrators are fudging test numbers: The pressure surrounding high-stakes testing is evident enough in the phrase itself. Tests now determine how schools are funded and, in some places, which teachers get bonuses. Incentives to cheat are baked into this system, and those incentives will only grow if more localities link teacher performance to compensation.

Similar temptations are elsewhere, with more disastrous consequences. The ever-greater focus on quarterly earnings by public companies has partially led to a rising tempo of corporate scandals since the 1990s. Executives, fearing shareholder backlash, have cooked the books to prop up stock values – most sensationally in the gigantic Enron and WorldCom frauds. (The Japanese manufacturing company Olympus is now embroiled in a major accounting scandal of its own.)

Executives didn’t used to obsess much about quarterly earnings, according to former CEOs I interviewed for a book I wrote about the Harvard Business School class of 1949. Now these numbers dominate corporate culture and pervert both business decisions and the ethics of executives.

How to avoid the insider trading net

Jeremy Kroll

Jan 31, 2012 13:23 EST

Four different hedge funds were implicated in the insider trading ring involving Dell Computer shares, a case that brought down Anthony Chiasson and shuttered his firm Level Global. But only one of those hedge funds, Diamondback Capital Management, was able to emerge from the three-year investigation still in business. The turmoil and uncertainty caused by the FBI raids drove investors out of the other funds. Diamondback, however, managed to hold onto half of its $5 billion in assets under management, even though it paid a $9 million penalty and signed a non-prosecution agreement with the government that admitted guilt.

For hedge funds, Diamondback offers an object lesson: Principals urgently need to protect themselves from business-destroying risks like insider trading. And though Diamondback responded to the raid better than Level Global and other firms, such as Frontpoint, which had to close most of its funds after a similar case emerged, there are a number of defensive measures hedge funds can implement well before law enforcement gets involved. Sadly, too few firms seem to know what these steps are or how to take them.

What did Diamondback do right? Where most firms circle the wagons, Diamondback brought in its own investigators from the outside. That move clearly played a decisive role. The U.S. attorney was specific about the factors that led to Diamondback’s non-prosecution agreement, including “Diamondback’s representation [...] that the misconduct [...] did not [...] extend beyond that described in the Statement of Facts, and was not known by the firm’s co-founders.”

By contrast, most internal compliance officers don’t have the ability to demonstrate a knowledge of their employees’ business contacts and social connections. But the soul of insider trading lies in friendships that elide into criminal behavior. In the indictment of Chiasson and the two traders at Diamondback, the government referred to these informal social and work contacts as part of a “criminal club of fund managers and analysts who swapped illegal tips.”

Over the past couple of years the way the government investigates and prosecutes insider trading has changed dramatically. Law enforcement now focuses on aggressively identifying and building insider trading cases around relationships – personal, social and professional – in a way that is unprecedented. For lack of a better term regulators are now “mapping” trader relationships, using both technology and human sources, to triangulate outlier trades against any personal contacts that may have been the source of non-public information.

To protect itself, a fund should have — and maintain — its own map. At K2 Global, we use proprietary software to help funds sift through the enormous amount of data — email, phone traffic, instant messaging — a fund produces. Then we follow up on that information with intensive investigation. Analysis by experienced professionals, including former securities lawyers, law enforcement personnel and journalists, can spot social ties that present a risk before there’s a problem.

There are two important stages to this process. The first is to conduct thorough due diligence on potential and existing employees. This is essential, even though some funds view this as invasive or a sign that they don’t trust their own employees.

It’s time for Cisco to cough up shareholder cash

Ralph Nader

Jan 30, 2012 09:12 EST

What is it that Cisco CEO John Chambers and his executive corps don’t get about their patient, loyal shareholders? It is called an appreciation of shareholder value.

As the owner of 18,000 Cisco shares, I’ve recently taken a closer, vested interest in the company’s remarkable lack of understanding of what Cisco’s owner-investors want from their very well-paid management.

In 2000, Cisco shares reached a peak of about $82 a share. Since then it has been downhill for the share price, notwithstanding the company’s continued growth, diversification and profits. The very much larger Cisco is now selling for around $19 a share — with no intervening stock splits. The first paltry quarterly dividend of 6 cents a share just started in 2010.

The consistent upward trajectory of Cisco’s economic indicators has given loyal shareholders a sustained hope that has gone unrequited. In the past decade, thanks to Chambers’ penchant for stock buybacks, these have totaled $60 billion, leaving shareholders with nothing to show for them but a low and stagnant stock price. Still, Cisco presently has liquid assets of about $45 billion, growing at almost $3 billion a quarter.

In the past year, I and other shareholders have stepped up our demand for an increase in dividends to 50 cents a year plus a $1 special dividend. That is the least Cisco’s officers should do for their shareholders, many of whom trusted Cisco for over a decade and relied on management to reverse the tiny rate of return that they received for their loyalty. To no avail.

The urgent need to protect the global supply chain

Janet Napolitano

Jan 27, 2012 11:47 EST

Every day, staggering numbers of air, land and sea passengers, as well as millions of tons of cargo, move between nations. International trade and commerce has long driven the development of nations and provided unprecedented economic growth. Indeed, our future prosperity depends upon it.

At the same time, threats to trade and travel — whether from explosives hidden in a passenger’s clothing or inside a ship’s cargo, or from a natural disaster — remind us of the need for security and resilience within the global supply chain. A vulnerability or gap in any part of the world has the ability to affect the flow of goods and people thousands of miles away. For instance, just three days after the earthquake, tsunami and nuclear tragedies struck Japan last March, U.S. automakers began cutting shifts and idling some plants at home. In the days that followed, they did the same at their factories in more than 10 countries around the world.

Ten years after the terrorist attacks of Sept. 11, 2001, we also continue to see the determination of individuals and groups to disrupt economies by targeting our transit and cargo systems. Understanding the seriousness of these threats underscores the need for a continued focus on protecting the global supply chain.

Just as important, we must move away from the outdated dichotomy that we have to choose between trade and travel efficiency, and trade and travel security. Security and efficiency must no longer be seen as mutually exclusive. It is possible to enhance security without increasing wait times, creating more paperwork and driving costs higher – and we are doing so already.

As I announced at the World Economic Forum in Davos this week, the United States released a National Strategy for Global Supply Chain Security, the product of more than two years of collaboration across the U.S. government, and with international and domestic public and private partners.

The National Strategy, created with the input of more than 60 subject matter experts and hundreds of supply chain stakeholders, takes a whole-of-nation approach to global supply chain systems, with two explicit goals: promoting the efficient and secure movement of goods; and fostering resiliency.

We will pursue this strategy in three main ways: