CEOs are human beings too!

How do you spend your Friday evenings?  Do you occasionally enjoy a meal with friends?  We do, too.  Do you engage in in-depth discussions on macroeconomics?  Well, maybe not.

Last Friday, our dinner host was an economist.  It made for interesting, if intense, banter. And, then he said something that stopped me dead in my tracks. 

He theorizes that corporate CEO behavior is changing.  They are sitting on record amounts of cash and not investing it, he says.  “Sure,” I responded.  “In a lackluster economy, there is not enough demand to motivate investment.” 

His reply was not cast in the usual language of political dialog.  He didn’t accuse those Sun-Tzu quoting, take-no-prisoners corporate CEOs of hoarding cash because they’re greedy.  Rather, he asserted that there has been a cultural shift in corporate America away from risk-taking. 

Human beings are pre-programmed to be risk averse.  If you want to convince somebody to do something, make him or her afraid of the alternative.

“Vote for me!”  “Why?”  “Let me tell you what will happen if the other guy wins…”

There’s lots of math in economics.  But, at its core, it’s a behavioral science.  Economists derive mathematical models to predict the effect of human behavior.  Corporate CEOs are paid millions to maximize returns on their capital (factories, equipment and all that cash).  But, turnover in the executive suite is pretty high.  Fortune 500 CEOs lose their jobs in about four and a half years on average.  So, if they are now so afraid of losing their cushy jobs and lavish pay packages that they aren’t taking risk, it can’t be good for the economy.

Still, I’m not sure I buy his argument.

Big shot CEOs don’t keep piles of cash in their offices.  They save it in banks and buy bonds.  An enduring truth of economics is that savings = investment and investment creates jobs.  If a corporation buys municipal bonds, cities use it to maintain their infrastructure.  If they buy corporate bonds, other companies invest in R&D, capital equipment and real estate, creating jobs in the process.  Some of that money ends up in private equity funds where investment managers make bigger bets than those risk-averse CEOs and earn bigger rewards when they are successful. 

Leon Black, CEO of private equity firm The Apollo Group, made $540M last year.  Poor Apple CEO Tim Cook took home a measly $4.25M.  If you are an average middle class earner, there’s not much difference between the two.  How much money can you spend anyway?  Doesn’t Tim Cook live pretty well? Leon probably owns more assets than Tim (he paid $120M for a painting – Edvard Munch’s The Scream.)  But, so what?  There’s only so much time in the day and you can only be in one place at a time.  How much happier can Leon be than Tim?

The Scream by Edvard Munch

Apple is sitting on more cash than any company in the US, about $147B.  And, they have invested much of it in US Treasury bonds.  How’s that for risk-averse behavior?  Even when CEOs invest cash in their own companies, they often acquire other companies, implement new technology or build factories overseas – all activities that kill jobs in the US. 

Maybe my dinner companion is on to something.

If big corporations don’t or won’t create jobs, it is left to the small, entrepreneurial companies to do so.  And, the evidence shows that small businesses create jobs at a faster rate than big ones.

Yet, government impedes the progress of small businesses in many ways through initiatives like raising the minimum wage, requiring health insurance and extending family medical leave benefits. Whether you think those policies are good or bad, you have to recognize that they have a negative effect on the return that business owners can get from their investments. 

Business investment provides jobs and drives innovation that creates more jobs.  However, the tax code doesn’t reward you for investing in your business so much as investing in real estate and other assets. When business investment and hiring get more expensive, business owners are less likely to invest in factories and offices and more likely to invest in beachfront property. 

The rich always find ways to remain rich. Government policies that provide the wrong incentives and penalties don’t prevent the rich from getting richer.  They prevent the poor and middle class from becoming rich.

It’s enough to make me want to SCREAM:

WHO WILL LEAD?

Movin' on Up! How George Jefferson Succeeded

The Jeffersons

Remember “The Jeffersons”? The black family that lived next door to Archie Bunker on “All in the Family” became so popular that Norman Lear spun them off to their own show wherein family patriarch George Jefferson, an upwardly mobile entrepreneur, moved up to “a dee-lux apartment in the sky” where they were the only black family.

George was bombastic, quick-tempered and politically incorrect much like Archie Bunker.  The new show exposed the bigotry of the white upper class of the time but also gave voice to the reverse bigotry of Archie’s mirror image. 

Jefferson succeeded by guile, hard work and shrewdness just like his white counterparts. 

Several economic studies of the last 20 years or so would suggest that George Jefferson’s upward mobility is rare, no matter the color of your skin.  A Harvard study published last fall suggests that social mobility in the US hasn’t changed much over time but varies a great deal by geography.  Ranking 50 metro areas by the percent of the population that moves from the bottom 20% to the top 20%, the study concludes that the factors leading to better social mobility are “less segregation, less income inequality, better schools, greater social capital, and more stable families”.  San Jose, CA tops the list and Charlotte, NC is at the bottom.  

In the late 1990’s the US Department of Education undertook an extensive study of 22,000 kindergarten students, examining their performance at an early age and identifying the social factors that contribute to their success or failure.  The study – the Early Childhood Longitudinal Study (ECLS) – attributed success to the level of the mother’s education, the number of books in the household and two parent families, among many other factors.  Black children underperformed all others but if one controls for the other factors, black children performed as well as their white and Asian peers. 

In other words, there was no difference in the performance of white and black children from two parent families with a well-educated mother and a home full of books.

University of California economics professor Gregory Clark took a different approach to examining social mobility.  He studied success based upon surname.  His findings suggest that lineage has more impact on success than all other factors combined. 

“This is true in Sweden, a social welfare state; England, where industrial capitalism was born; the United States, one of the most heterogeneous societies in history; and India, a fairly new democracy hobbled by the legacy of caste. Capitalism has not led to pervasive, rapid mobility. Nor have democratization, mass public education, the decline of nepotism, redistributive taxation, the emancipation of women, or even, as in China, socialist revolution,” claims Professor Clark.

Ashkenazi Jews named Katz, Scots named MacDonald and Chinese named Wang are more likely than their peers to be successful.

The idea that genetics play a larger role than all other factors in determining success flies in the face of our instincts as parents.  But, Professor Clark’s conclusions are supported by other studies including the Colorado Adoption Project, which followed the lives of 245 babies put up for adoption.  The conclusion?  (You’re not going to like this.)  The study found no correlation between a child’s personality traits and those of their adoptive parents.  In other words, in the battle of nature vs. nurture, nature wins!

So, parents can do only so much to improve their children’s prospects.  Provide a stable family life, read to them and send them to a better school if you have the choice. Other advantages are an accident of birth.

When I wrote about the topic of increasing the minimum wage a few weeks ago, some respondents slammed me for advocating that the poor just “need to work harder and stop whining”.  But, that was not my intention.

The thrust of my argument is this:  raising the minimum wage will do nothing to address income inequality or social mobility.  An American view of a just society encompasses equality of opportunity and that is the key to improving on both scores.

We need better schools and better families, particularly in racially segregated neighborhoods. Local communities must come together to achieve the needed progress.  To quote Germaine Smith-Baugh, CEO of the Urban League of Broward County (FL), “Give me a family and I’ll give you a block.  Give me a block and I’ll give you a neighborhood.  Give me a neighborhood and I’ll give you a community.”

The federal government has done its part.  Professor Clark’s findings suggest that the civil rights legislation of the 1960’s has helped African-American descendants of slaves achieve more starting in the 1970’s.

Perhaps that explains George Jefferson’s popularity.  But, it doesn’t explain his success.  His success is the result of his guile, hard work and shrewdness.

WHO WILL LEAD?

On social mobility: confessions of a former Yuppie

My first Bimmer

Remember Yuppies?  In the early days of demographic stratification, I was classified as a Young
Upwardly-mobile Professional – a Yuppie.  But, I am no longer young or upwardly mobile; so, I don't qualify.

My Dad was a Yuppie, too.  No one was called a Yuppie in his day; but he was young and upwardly mobile.  He was also a businessman.  Today we would call him an entrepreneur.  He and two partners each deposited $2000 in the bank and started a company. 

It was quite an accomplishment given where he started.  When I was born, he was collecting Aid toFamilies with Dependent Children (AFDC, a federal/state financial aid program).  Thank God for the safety net!

Later in life, Dad sold his business to retire.  He would never have been described as wealthy; that was not his goal.  His goal was to be secure in retirement and he achieved that. 

Dad also achieved something I never did.  He transcended his socio-economic class.  He started poor and became upper middle class.  I started upper middle class and became – well – upper middle class. 

Dad worked hard and played by the rules. 

In the context of today’s debate about social mobility, he would be a success story.  He relied on government assistance when he needed it but paid it back many times over by paying his taxes when he was economically successful. 

A Harvard study published last year indicates that there has been little change in social mobility since my Dad’s day.  Still, we are having a debate – which is bound to affect policy, the budget and, eventually, taxes – about how to help those in need move up the economic ladder.  The study pointed to geography as the most important factor in social mobility.  Areas where there was less segregation, more stable families and better education tended to have greater mobility.

Michele and her family

Yet, the debate seems to be about raising the minimum wage.  How will that provide the stable environmental factors that will enable people to move up the economic ladder?

So, I am confused.  We lionize hard working Americans and say we want to help people move up the economic ladder; but, the prescription has nothing to do with hard work.  It is to unilaterally hand more money to people for the same amount of work. 

I support the concept of a social safety net.  My Dad took advantage of it when he really needed to.  But, he succeeded perhaps more than most of his day because he worked hard and made tough choices about how to live his life and support his family.  His success was self-made.  It was not the result of the government reapportioning wealth.

Perhaps, the best perspective I have read on this topic came from my cousin’s daughter, Michele (my first cousin, once removed, if you’re keeping score).  She and her husband are raising three boys on Long Island.  They’re working hard and playing by the rules.  Here is what she said on her Facebook Timeline:

“I usually don't do this on FB but can't help it because it's too irritating. Fast food workers are striking because they want minimum wage to be increased to $15 an hr.?? So after I pay my student loan bills and taxes they will make the same as me??? … So that's what we do now? Protest to make more money?? What happened to making more money based on merit and how good u are? Ok I'm done now:)”

So am I.

WHO WILL LEAD?