A Holiday Toast

My holiday-season “party piece” is a song I call “The New Year’s Toast”. The chorus goes:

So we’ll fill up our glasses and drink once again

To peace on the earth and good will among men.

It was written by Peggy Seeger in 1960, and it’s dated in some ways. One is the non-gender-neutral language. And it offers the hope for “a world without fallout” from nuclear-weapons tests, which we have thankfully achieved.

But one of the main reasons I like it (apart from the conviviality and singability) is that it celebrates working people. There’s a verse each for construction workers, railroad workers, miners, farmers, writers and artists, and so on.

Who does that anymore? These days we celebrate executives, tycoons, innovators, and “entrepreneurs.” Steve Jobs, Bill Gates, Warren Buffett, Donald Trump, Lloyd Blankfein and people like them are our heroes. We’ve bought into the Austrian brand of economics that claims that economic growth comes from “disruptive innovation” rather than hard, persistent work, and that leadership gets the credit for everything that happens in a company.

Traditional economics teaches that economic growth comes from the process of specialization. As the extent of markets increases, the division of labor becomes finer, and workers become more and more specialized.  Technical innovation is part of the story, but happens mostly as greater specialization gives workers the opportunity to focus on narrower and narrower tasks, and develop new routines and new tools for addressing them. Economists pack a lot into the concept of “technology”, including things like the order in which things are done, or the way machines are laid out on the shop floor. Big breakthroughs are important, but they are rare, and don’t account for the bulk of growth. And there is a lot of hard work involved in applying breakthroughs to practical problems. Thomas Edison, a great innovator, said that it is “one percent inspiration, and ninety-nine percent perspiration.”

Leadership is important, but without workers who are intelligent, diligent, responsible, and creative, leadership doesn’t mean much. If everyone works with only their own interests in mind, the business doesn’t work. Workers’ loyalty to the business is essential, but requires the leaders’ partnership with the workers. This was an issue in the discussion of President Obama’s “You didn’t make that” comment, that was so misunderstood. He was referring to the government’s role in providing the economy’s infrastructure, but also to the role of workers in building businesses.

So, sing it with me:

A toast to the casual laboring man,

Who lives where his work is, who works where he can,

To the builders and spidermen and bold engineers,

May your wages keep rising, lads, over the years.

The Scandal of Pharmaceutical Prices

I just spent a frustrating hour listening to a discussion of pharmaceutical prices on the Diane Rhem Show on public radio. The panelists uniformly took a perspective informed mostly by Austrian-style economics. Prices and profits need to be high to spur innovation. High prices are justified by the “value” of the products to their users. U.S. consumers subsidize research and development that benefits consumers in countries that regulate drug prices. Drug advertising benefits consumers by drawing attention to new drugs.

Now, a neoclassical economist of the Cambridge, Massachusetts variety, or even of the “Good Old Chicago School” (as McCloskey has called it) would raise some protest. Economic efficiency requires that prices should be related to costs. Efficient use of pharmaceuticals would come about if the price were set at the marginal production cost of the pill, with R&D covered by government or charity. R&D on “me-too” drugs is wasteful. You could make a case that if government or insurance is covering the cost, some charge for the capital invested in the research is appropriate. I’m not (that) neoclassical, but it seems to me that cost should enter into this discussion. The disjunction of prices from costs is what fuels the public concern about “greedy drug companies” that the panelists were so willing to dismiss.

But I’m an institutionalist. Health care is one of the “helping professions”. That means that you are dealing with people in distress, for whom this expenditure is not some kind of lifestyle option. It means that the industry has a moral obligation to assist people regardless of their financial circumstances. It means that people go into this business expecting that their compensation will be less than they might make in a more commercial line of work, because helping others is its own reward. (It’s akin to the choice I made to go into Christian higher education instead of, say, finance.) We don’t expect drug companies to be greedy. We expect that much the research will be financed by the NIH and by the big disease charities that have telethons and door-to-door campaigns and memorial requests. The TV commercials and the “lifestyle drugs” we don’t need.

These new prescription drug scandals are of a piece with business scandals going back to Enron and the S&Ls. Business has lost sight of its public responsibilities and moral purposes. It has bought into bad economics of the Austrian School, and bad ideology of libertarianism and “free markets”.  This is not the way that American business operated in the “golden age” of the 1950s and 1960s. We need leadership from the business, political, and civil society sector to point to a different way.

Creeping Feudalism

A couple of years ago I published an essay in Perspectives on the threat that creeping feudalism poses to the U.S. economy. Over the last 15 years or so there have been changes in policies, proposals, public attitudes, and even laws that have increased the ability of the rich to keep their estates intact over many generations. This raises the specter of our current extreme inequality resulting in the establishment of a hereditary aristocracy in our country, with control over politics, the economy, and culture.

This activity has been kept very quiet, so doing the research on this topic was difficult. Even with the internet as a tool, it was not easy to find out what was happening, especially in the legal sphere. I have now discovered two recent books on this topic by prominent law professors that deserve wider attention.

Lawrence M. Friedman of Stanford Law School has written Dead Hands: A Social History of Wills, Trusts, and Inheritance Law (Stanford Law Books, 2009). The strongest characteristic of this book is its clear and complete explanations of the current state of the relevant law, especially the laws concerning wills and trusts. I discovered that the situation is even worse than I thought: the Rule Against Perpetuities has been completely repealed in 20 states, opening the door for "dynastic trusts", private family trusts that can accumulate principal, avoid taxes, preserve family control over assets, and never have to be dissolved.

The social history part of Friedman's book is noticeably weaker. He detects something of a movement in contemporary mores towards giving the dead more control over what happens to their estates, and the institutions of government less. This is based on casual observation as much as anything else, and there is no attempt to connect it to other social movements or changes in culture.

Nor does Friedman see much danger in this. He does not think that accumulating dynastic trusts will grow to dominate the allocation of capital, or that wastrel, ignorant children of the upper class will ruin the crown jewels of the society. But he doesn't express much confidence in his conclusions. It has the air of classroom speculation.

The other book is Immortality and the Law: The Rising Power of the American Dead by Ray D. Madoff, of Boston College Law School (Yale University Press, 2010). Though not as detailed in its description of the law, it covers a wider variety of topics, including the treatment of dead bodies, posthumous publicity rights, and copyrights. However, it does not include much consideration of the effects of estate taxes.

Madoff does not venture into social history, or speculate on changes in social attitudes. However, she does offer normative conclusions about the recent direction of public policy. As her subtitle suggests, she believes the dead are becoming more powerful, a conclusion that is hard to avoid. She does not believe this is a good thing, and would like to see the direction reversed by, for example, strengthening the Rule Against Perpetuities and putting shorter time limits on copyrights.

Neither of these books draws out the implications of these new developments for the operation of our economic system. This is where I believe the greatest dangers lie, but then, I'm an economist, not a lawyer. Democratic capitalism (as Michael Novak calls it) is a fine economic system. The crypto-feudalism that we are evolving toward does not promise to work nearly as well.

In an article in the September issue of The Banner, three members of Calvin's business department (Tom Betts, Bob Eames, and Jill Risner) ask why business (as a social sector) has an image problem, and why we should care about this. In the online discussion questions, they repeat the question about why the public in polls rate the honesty and ethical standards of business so low.

I don't think this should be a mystery. Let's consider the evidence, starting in the 1980s:

• The savings and loan crisis (Lincoln S&L, the Keating Five, Neal Bush, Whitewater, etc.)
• The collapse of Long Term Capital Management, and the near failure of several money-center banks that were major creditors of the hedge fund
• Enron (and WorldComm, Global Crossing, Adelphia, SBC, and a bunch more)
• The Spitzer investigations, bringing to light widespread Wall Street corruption and cronyism
• The collapse of Barings Bank due to unauthorized currency speculation
• A series of insider trading cases including Raj Rajuratnam
• The financial crisis of 2008 (Countrywide, WaMu, AIG, Bear Stearns, Lehman, Madoff, and more)
• Continuing fines levied on major banks for breaking rules on market manipulation, proprietary trading, and fiduciary responsibilities

Add to this the growing inequality of the income distribution, including the decline of median wages and the hollowing out of the middle class, and the unyielding opposition of the business sector to the interests of working people in seeing their wages increase along with productivity.

Later in the article, the authors do acknowledge (citing Jeff Van Duzer) that "the dominant business paradigm needs to be turned on its head: instead of customers and employees being the means of serving shareholders, shareholders and their capital should serve customers and employees." It cites some bright spots, such as the commitments of companies like Patagonia and Chipotle, and the "B Corporation" movement.

But the article seems to be designed to convince ordinary Christians (and perhaps their pastors) that business is OK, and that these exceptional companies that they highlight are typical. Well, Enron was not typical either, but it turned out to be much closer to representing the current culture of American business than Patagonia can claim.

The article makes many excellent recommendations for how businesses should be run, and the attitudes that businesses should take to the responsibilities they have to various constituencies, including not only customers and employees, but the general public. What the authors do not do is give us an understanding of how the culture of American business can be changed. Having Christians read a few books, such as Van Duzer's, is a good thing. But what we need is a campaign to evangelize the business community, and that's not going to be easy.

Atkinson on Inequality

I recently finished reading Anthony B. Atkinson’s recent book Inequality: What Can Be Done?  It doesn’t duplicate what Piketty did in Capital in the Twenty-First Century, but in some ways I like it better. Atkinson’s examination of the determinants of income distribution focuses more on product and labor markets, and on the social context in which markets operate. Atkinson does not believe that we are condemned to increasing inequality because r is greater than g. He points to other times and places where inequality has been reduced even though growth rates were low.

Atkinson points out that government policy had a lot to do with decreasing inequality in the past, and he proposes a long menu of options to consider at this point. In this he differs from Piketty, whose policy proposals are mostly limited to a global wealth tax. His fifteen proposals include comprehensive redesign of the income tax, to make it more progressive and to introduce an “earned income discount”, rather than the present discount for capital gains. He proposes a progressive lifetime capital receipts tax in place of the estate tax. He believes that all young people should receive a capital endowment when they reach adulthood, and that there should be a taxable “participation income” and a substantial child credit.

Many of these ideas would not get a lot of support in the U.S. today, or even in the U.K., Atkinson’s home. But they are cleverly designed to deliver help to those in need while preserving incentives and garnering strong political support. Everyone is eligible, but benefits are taxable at progressive rates. They borrow their best features from the design of successful programs like Social Security. Political action may be long coming, but planting these ideas in the public imagination now is important.