Friday, February 26, 2016

Balancing Growth with Sustainability - Why there should be a stronger emphasis on social responsibility in business strategy

 As a business and economics student, I have been inundated with a core set of tenets. Firms exist to maximize profitability. And firms must presumably limitlessly increase growth and profits year after year or face market backlash, activist investors, and/or going out of business.

The underlying theory is that this maximization of profits eventually optimizes societal welfare; meanwhile, the desire for growth will drive innovation, moving the production frontier and increasing the volume of goods and services society can provide over time. While valid in many cases, it has also been pushed uncritically and relentlessly as an absolute truth.

But does this pursuit for growth and profits always provide value? Is there a limit? At some point, when does value creation stop and slide into zero-sum redistribution, or even devolve into a net reduction in societal welfare?

In his book Capital In the Twenty-First Century, French economist Thomas Piketty painstakingly establishes what happens when returns to capital outpace economic growth over long periods of time. Eventually, income and wealth becomes increasingly concentrated in the hands of the owners of capital, raising inequality. In conjunction with this, multiple studies have established a connection between very high levels of inequality and reduced social mobility. In other words, equality of opportunity, a core tenet most of us value, gets undermined: in a world of equality of opportunity, we expect social mobility to be high and frequent movement of individuals across income percentiles. Instead, more born poor remain poor, while those born rich retain their wealth. As the wealthy gain power, they also have an incentive to keep it. We’ve seen this through their immense influence in political and academic circles, as their money funds policy research and critical operations in each.

But perhaps all this is too abstract for many people to observe. What are some more tangible ways to express the dangers of growth?

Perhaps we can first dive into the processed food and beverage industry. As Michael Moss documented in Salt, Sugar, and Fat, we have seen dramatic growth in this market over the past couple decades. Companies create innovative new formulas and a combination of flavors and textures designed to meet a “bliss point” – where our taste buds would be maximally satisfied. They have complemented this product design with extremely successful marketing campaigns, building highly valuable brands over time (PepsiCo, for instance, has 22 brands worth $1 billion or more). They executed their strategies at an inflection point of societal change, where the entry of women into the workforce and the decline in home economics awareness drove the need for on-the-go food and products requiring little prior preparation. From a business strategy perspective, their work overall has been absolutely phenomenal, and the book sometimes reads like a series of one successful business case after another.

No doubt there is substantial social value in what these companies did. By creating needs that people did not even know they craved until they experienced it, these food companies literally created value. Surely one would struggle to come to terms with a world without Classic Coke, Lay’s, Lucky Charms, or any one of hundreds of products that have become classic treats or even staples. They support the lives and passions of hundreds of thousands of employees. When public health concerns mounted, they buoyed other industries such as dietary supplements and healthier food products and juices. And at least recently, companies had made a point to do philanthropic work and to emphasize sustainability and social responsibility.

But all this growth came at terrible social and ethical cost. The “bliss points” in taste happen well beyond when a product would be considered unhealthy. Their combination of addictiveness and low satiety encouraged overeating. Time and time again, companies marketed to low-information consumers, who may lack awareness of the nutritional implications. They even made product lines and marketed them explicitly for children, who would develop dependence on the unique taste while they were still cognitively developing and who could uniquely pressure parents to make these purchases.

In combination with more sedentary lifestyles and reduced time or willingness for physical activity, obesity rates jumped. This placed great burden on health care, not just due to increases in heart attack and strokes, but also from the need to constantly monitor someone with diabetes or hypertension. And food companies bore almost none of the burden for this massive negative externality for which they were at least partially responsible.

The rise in dietary supplements and “healthy options” is similarly suspect in terms of value. Oftentimes, dietary fads play completely on a consumer’s need for instant gratification, and do not produce tangible results. They can come with deceptive advertising and sham endorsements from popular figures such as Dr. Oz. While healthy options are more legitimate, they more often than not only offer an appearance of health or freshness, with only modest reductions in calorie count, and carry similar risks of low satiety and overeating. Sometimes, they simply become an additional, high-margin apparatus of food companies.

Surely some employees saw through the enormous harm that was done and tried to counteract it? The truth is, they tried. But the same goals of growth and profit that incentivized this behavior made it very hard to correct it. When Campbell’s soup attempted to reduce the sodium content of its soups, what was left was a bitter, metallic taste. When other companies tried to increase the sustainability of the growth by, for instance, pushing healthier products and reducing marketing towards children and low-information consumers, Wall Street rebelled, and the subsequent drops in share price and market evaluations forced them to reconsider. Spurred by the quest for profits, their hands are now tied by the same mechanism.

But perhaps that is simply an extraordinary example with a product category that had a clear negative effect on public health. Surely the extraordinary success of a company like Apple offers a more inspiring story?

Sadly, the growth in demand for consumer electronics, particularly smartphones, in combination with a need to maximize profits, had a lot of negative side effects. In 2010, 18 workers of Foxconn, a subcontractor for Apple and a number of other consumer electronics companies, attempted to commit suicide due to harsh working conditions and low pay.

Even though Apple made some changes through its commission of the Fair Labor Association, there is still work to be done. Wage increases have not kept up with productivity: although they have increased by 9 percent, quotas have risen 25 percent. Purchasing power has also been eroded with sharp increases in food and housing costs. Workers still exceed the 49 hour limit per week stipulated by Chinese law. New issues such as insufficient lighting and high noise levels have been found. Moreover, Apple has not relaxed Foxconn’s harsh contractual conditions or provided any money to finance the improvements, reducing Foxconn’s ability to make reforms quickly. Clearly, even the current pace of reform has left much to be desired.

To be sure, the direct financial benefits in accelerating reform are uncertain, but the costs are significant and tangible. It may be difficult to push change faster than the current pace taking place. Of course, one could argue that despite these harsh conditions, they may still represent an increase in the standards of living for Chinese workers. But Apple and other multinational firms could have done so much more to accelerate this. Still, the welfare of nearly a million Chinese workers at Foxconn is at stake. Moreover, any breakthrough there would send ripple effects throughout the Chinese manufacturing industry, help transition China towards a consumer economy and a bigger market for Apple, and accelerate international convergence in wages.

It’s quite telling that “if iPhones were assembled in the United States – assuming labor costs ten times [in 2008, it was 25 times] that in China, equal productivity, and constant component costs – Apple would still have an ample profit margin, but it would drop from 64 percent to 50 percent. In effect, Apple makes 22 percent of its profit margin… from the much higher rate of exploitation of Chinese labor” (from The Endless Crisis, Robert McChesney and John Foster). Even if Apple asked Foxconn to double wages and slash worker hours, the impact to its margins would be minor – 2 percent at most. That it does not do so suggests the sheer power of the gospel of profit maximization, along with Wall Street’s rigid enforcement of this tenet, and the relative lip service companies give to social responsibility in comparison.

A final example is not as visibly harmful, but the implications are nonetheless troubling. Here’s Tom Ford on why marketing Gucci is critical:

A black pair of pants from Gucci, to be honest, is not that much different from a black pair of pants from Prada or a black pair of pants from any of our other competitors… But in the customer’s mind, this basic pair of pants can be endowed with a quality that makes her feel she’s wearing the right basic pair of pants, the cool pair of pants, the pair of pants that’s going to make her whole life come together, and that’s in a sense also what you’re selling.

Again, there is some justification to differentiation on an emotional basis. For instance, it is one of the most effective signals that a given brand exudes quality or trendiness. Nonetheless, there is something ethically unsettling that playing on emotions and psychological need is able to trump actual differentiation in terms of materials and product features.

Even if this strategy is not zero-sum by growing the market instead of redistributing market share, a different issue arises: sustainability. In the case of any tangible product, manufacturing more product requires the use of natural resources and energy. Pursuing infinite growth in sales and profits, whether by emotional manipulation or actual differentiation, increases the risk of over-consumerism, which crowds out spending in other areas that are more sustainable, and also places immense strain on natural resources and the environment.

At its core, the pursuit of infinite growth and profits is an excellent strategy for the individual firm. What is not so clear is whether that same benefit extends to the industry as a whole, or even to society as a whole. Eventually, this relentless pursuit raises the risk of increased inequality, worker exploitation, psychological manipulation, and environmental strain. There needs to be a much stronger emphasis on sustainability, and multinational corporations should be leading the charge.

Sunday, February 14, 2016

Restoring congressional independence: increasing legislative and research staff to reduce capture by lobbyists

While doing some reading last night, I came across a great idea for political reform that hasn’t gotten much attention. I decided to do a short post. This may be the first of a series on institutional failure and reform.

Over the past 30 years, the number of congressional and research staff dramatically decreased. The Government Accountability Office (GAO) and Congressional Research Service (CRS) both have 20 percent fewer staff today than in 1979. At the same time, the number of committee hearings declined as well, and subcommittees had less autonomy to choose their own topics as leadership dictated what kind of legislation they wanted to pass. This trend accelerated in 1995, when anti-government Newt Gingrich and friends laid off a lot of this staff. This included institutions like the Congressional Research Service, the Congressional Budget Office, and the Government Accountability Office (which is so successful at reducing waste that it saves $90-100 for each dollar invested!). It accelerated again in 2011, when the Tea Party wave reduced support even further.

Now, we have overworked and underpaid staffers (given the high cost of living in DC) who are increasingly dependent on external sources for knowledge. This reduction in institutional support coincided with enormous increases in societal, technological, and political complexity. “The U.S. code of federal regulations grew from 71,224 pages in 1975 to 102,295 pages in 1980 to 174,545 pages by 2012,” in part even because they are explicitly written to hide their impacts.

Filling this void are think tanks and lobbyists, happy to provide subject matter expertise, with the added bonus of their bias towards the interests they serve and their tendency to make misleading or even false claims. In fact, the Heritage Foundation played a central role in the government shutdown in 2013 because they were so influential within the GOP and wrongly believed that Democrats would capitulate.

In 2010, the House spent $1.37 billion and employed between 7,000 and 8,000 staffers. That same year, corporations and special interests spent twice as much—$2.6 billion—on lobbying (which excludes billions spent on other forms of influence) and employed 12,000 federally registered lobbyists, according to Sunlight Foundation.

The result is capture by lobbyists, which are overwhelmingly business interests: 80 percent of all spending is made by corporate interests, while 90-95 percent of lobbyist organizations represent businesses. In conjunction with the infinite need of money and the need for congressmen to fundraise endlessly, they have immense influence over the legislative process, while congressmen don't know enough to ask the right questions because they aren't at their committee meetings.

To close to the circle, a lot of these overworked and underpaid staffers eventually seek to enter the revolving door towards lobbying, where they make multiples off their current public salaries (Lawrence Lessig estimates a minimum of six times their current salaries). Turnover is also extremely high: of the staffers that started in 2005, 82 percent of Senate staffs and 70 percent of House staffers left by 2012.

The solution is relatively simple: "double the committee staff, and triple the money available for salaries." The increase would be split into specialized committee staff under committee chairs and an additional committee staffer on a congressman's detail. This allows for long-term staff unaffected by electoral change who would have the historical knowledge and expertise to advise congressmen on policy issues.

Another interesting idea, brought up by Craig Montuori in a Quora answer, is a hyperlinked and connected database for the Code of Federal Regulations and the United States Code, which includes showing how it changes over time. It could be combined with CBO projections per section.

Right now, 0.2 percent of all spending funds Congress and the Senate, or $6 of the $3000 we spend per American. If we simply tripled that amount, we would be able to provide far better oversight, anticipate implementation issues, and provide a powerful check towards special interests.

Further reading:

The Big Lobotomy: How Republicans Made Congress Stupid – Washington Monthly, Summer 2014

A New Agenda for Political Reform – Washington Monthly, Spring 2015

Saturday, February 6, 2016

A reading list for those interested in the urgent issues of today

Over the past five years, I've read a number of books that have been instrumental in informing my views. I'd like to give a list of some of the books I found most useful, separated by category.

I have not read all of them; I will specifically notate which books I have not yet read but am interesting in reading.

In case you didn't notice, I found out about a lot of books on this list via a combination of Foreign Affairs reviews, The Economist reviews, and Daily Show interviews. I recommend all three for finding new books!

Inequality - economic and political failure

Winner-Take-All Politics: How Washington Made the Rich Richer--and Turned Its Back on the Middle Class - Jacob Hacker and Paul Pierson (2010) (Amazon link) (Foreign Affairs Review)

  • Thirty-year political history spanning the start of the Carter administration to the first two years of the Obama administration showing how government has time and time again tilted policy in favor of the rich, how special interest groups have had a meteoric rise in power, and how policy proposed to help the middle class were watered down or failed - a concept known as policy drift.

Republic, Lost: Version 2.0 - Lawrence Lessig (2015) (Amazon link) (Daily Show interview with Lessig) (TED Talk) (The Grant and Franklin Project - key solution)
  • Carefully documents how money in politics has a serious corrupting influence on members of Congress. Also shows how it makes it politically impossible for both the left and the right to pass the policies they care about. Key solution is a publicly funded election: it involves a voluntary program where politicians can solicit donations from a $50 voucher given to all voting age Americans, which can be complemented by up to $100 in individual donations. To participate, they must reject large donations and PAC money.

Dollarocracy: How the Money and Media Election Complex Is Destroying America - Robert McChesney and John Nichols (2013) (Amazon link)
  • Like Republic, Lost, it shows how money in politics is destroying political efficacy. It also conducts a thorough analysis of how media has consolidated over time and been increasingly dependent on commercial interests and on coverage cues from those in power. One section even talks about data mining, and how that exacerbates the effects of echo chambers and polarization. A fantastic read.

The Crash of 2016: The Plot to Destroy America--and What We Can Do to Stop It - Thom Hartmann (Amazon link)
  • Talks about the tendency for there to be a serious crisis in our country every 80 years. The first crisis was the Civil War. The next, the Depression. Every 80 years, incoming generations forget about the lessons of previous generations and repeat mistakes; the balance of power of so-called royalists (originating from people who supported the British during the American Revolution) consequently increases. One thing I loved about this book was its thorough coverage of a shadowy organization called the American Legislative Exchange Council, a conservative coalition of powerful special interest groups that writes so-called "model" legislation to be introduced in state legislatures, such as extremely strict "right-to-work" legislation. Here's John Oliver's coverage of that.

Saving Capitalism: For the Many, Not the Few - Robert Reich (2015) (Amazon link) Have not read
  • By former secretary of labor under Clinton administration; now one of the most important and articulate supporters of Bernie Sanders.

Capital in the Twenty-First Century - Thomas Piketty (2014) (Amazon link) (Book club series on The EconomistHave not read
  • Central premise: as long as the return on capital is greater than economic growth (r > g), then the distribution of wealth will increasingly trend towards the owners of capital rather than working people. This has troubling implications for income inequality.

The Submerged State: How Invisible Government Policies Undermine American Democracy - Suzanne Mettler (2011) (Amazon link) (Foreign Affairs Review) Have not read
  • Central premise: a lot of governmental policies designed to help the people are effectively invisible: the primary example of this are tax expenditures. This causes Americans to routinely underestimate the actual role government plays in shaping distribution and inequality, and consequently to demand a smaller government than would be effective.

Media and the Newsroom

The Death and Life of American Journalism: The Media Revolution that Will Begin the World Again - Robert McChesney and John Nichols (2010) (Amazon link)
  • An in-depth account about the decline of media since the 1970s. Amazingly, even before the Internet and the financial crisis accelerated the financial troubles of news publications, they were already aggressively slashing the size of the newsrooms on Wall Street's demand. Moreover, there are two trends that undermine the ability for media to be a watchdog: first, they tend to take cues for coverage from the official sources in power, which distorts their agenda. Second, the need for ratings drives sensationalist garbage (Exhibit A: Buzzfeed, tabloids, celebrity news). McChesney and Nichols outline three main solutions: first, generous tax credits for news publications; second, a voucher for the American people to publicly fund our news; and third, a dramatic increase in funding for existing public news outlets like PBS and NPR.

Manufacturing Consent: The Political Economy of the Mass Media - Noam Chomsky and Edward Herman (2002) (Amazon link) Have not read
  • Not familiar with what specifically the book covers, but I think it's probably very similar issues to the book above (i.e. the unholy marriage between media and commercial interests).

Banking and Wall Street

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown - Simon Johnson and James Kwak (2010) (Amazon link)
  • A fantastic background on what happened in the run-up to the financial crisis, and how early attempts of relief and reform were badly undermined by their continuing influence (for news coverage, see The Economist's excellent posts). Also has a great proposal to break up big banks: capping commercial banks' assets to 4 percent of GDP, and investment banks' assets to 2 percent of GDP (at least 5-7 banks are currently too big for these definitions).

Energy and Climate Change

The Carbon Crunch: How We’re Getting Climate Change Wrong—and How to Fix It - Dieter Helm (2012) (Amazon link) (Economist review)
  • Has some interesting views about renewable energy. Right now, because of their cost structure and intermittent nature of sun and wind, they are ironically encouraging coal power plants as an alternate source in Europe. Renewable energy subsidies also represent a substantial market distortion that ignores that other approaches towards reducing emissions may be most cost effective (i.e. energy efficiency). I think it is too sanguine on its views on the ecological damage of fracking or the impact of methane, but it raises a good point that natural gas can represent a good transition energy source. In the meantime, Helm believes the best approach is a carbon tax (to correct the externality) and aggressive R&D towards the next generation of renewable energy sources (particularly energy storage).

The Last Hours of Humanity: Warming the World to Extinction - Thom Hartmann (2013) (Amazon link)
  • A succinct account on what climate change looks like, and why the problem is so urgent. This really is an existential crisis.

K-12 Education

The Death and Life of the Great American School System: How Testing and Choice Are Undermining Education - Diane Ravitch (2010) (Amazon link)
  • One of the first and most authoritative pushbacks against the neoliberal trend towards Accountability, Standardized tests, Choice (charter schools and school vouchers), Merit Pay, and hostility towards teacher unions. Shows how standardized testing and excessive reliance on data-driven strategy only promotes teaching towards the test and values the ability to test-take over actual mastery of course material. Criticizes charter schools and vouchers for private schools as crowding out resources towards public schooling. Shows how merit pay doesn't have a material impact in performance, and could actually undermine it by decreasing cooperation.

Higher Education

Excellent Sheep: The Miseducation of the American Elite and the Way to a Meaningful Life - William Deresiewicz (2015) (Amazon link) (Foreign Affairs review)
  • Another pushback towards neoliberal trends, this time in higher education. Laments the increasing concentration of Economics and Business majors, and the increasing share of students going into investment banking or consulting. Meanwhile, support staff has shrunk, administrative roles have proliferated, and universities tend to treat students as customers, investing in endowments and flashy buildings like student centers and stadiums and becoming like a corporation in every sense of the word. Argues that in some ways, top universities have been getting less diverse over time, particularly with the drive towards income and prestige. Also critiques the test preparation industry for affluent students, and their drive towards a million extracurricular activities.

Degrees of Inequality: How the Politics of Higher Education Sabotaged the American Dream (2014) - Suzanne Mettler (2014) (Amazon link) currently reading
  • Shows a clear gap between prestigious private universities, 4-year public universities, community colleges, and for-profit colleges. For the latter, for-profit colleges have consumed the lion's share of federal aid for student loans, and yet have the highest drop-out rates and fewest employable graduates, leaving students with huge debts. Shows how where you go to college, in addition to the background influencing where you end up, has a very material impact on outcomes.


Salt, Sugar, and Fat - How the Food Giants Hooked Us - Michael Moss (2013) (Amazon link) (NY Times review) (Daily Show interview)
  • Shows how different food companies chemically engineered food-like products to maximize different "bliss points" and then successfully marketed them to the detriment of public health. They are strongly incentivized to stay the course or face Wall Street's wrath. One of the most striking examples was when Campbell's soup tried to reduce its sodium content: it became bitter and metallic in taste. In conjunction with this, government policy encouraged large increases in the consumption of cheese, red meat, and processed food ingredients such as corn (corn syrup and corn-based chips). This trend continues worldwide, where international expansion of these companies almost always coincides with increases in obesity rates, along with diabetes and heart disease. This places a lot of stress on our health care system.

Pharmaceutical Drugs

Bad Pharma - How Drug Companies Mislead Doctors and Harm Patients - Ben Goldacre (2012) (Amazon link) (brief Foreign Affairs synopsis) currently reading
  • From Foreign Affairs: "According to Goldacre, major drug companies have financed the ghostwriting of papers supposedly penned by reputable scholars in respectable scientific journals, systematically withheld experimental drug-testing data from public and professional scrutiny, and failed to run promised trials to detect side effects after drugs have been approved for sale. In the face of this unethical behavior, regulators on both sides of the Atlantic [UK] have been complacent and negligent."