America is the greatest entrepreneurial nation in the world. But there are really two kinds of entrepreneurs here – product entrepreneurs and financial entrepreneurs –and only one of them truly builds the economy. Product entrepreneurs find new ways of satisfying customers. Financial entrepreneurs find new ways of … well, making money off money.
Problem is, financial entrepreneurship is becoming more and more dominant in the economy. Thirty years ago, finance was the handmaiden of American industry. Now industry is run by finance. For every budding Steve Jobs or Bill Gates there are now thousands of aspiring private equity or hedge fund managers. That’s because this is where the big bucks are. Which means, it’s where some of our most talented young people are going.
The problem isn’t just the brain drain. It’s what the brains are being used for. Competition in the real economy generates better products. But competition in the financial economy is often a zero-sum contest. For every investor or speculator who wins, there’s another who loses. Capital markets may be more efficient, but the added efficiencies are often minuscule – beating the competition to a profitable investment by a tenth of a second, or coming up with ever fancier derivatives, collateralized loan obligations, mortgage-backed securities. The results are ever more complicated, harder to value, and may prove diastrously fragile when the markets turn down.
Financial entrepreneurship is also forcing managers in the real economy to become ever more short-sighted, glued to the quarterly reports. Private equity moguls say they’re freeing corporations from the quarterlies but the deals they do weigh down companies with so much debt they have to focus on short-term cash flow to survive. Often they have to cut long-term investment – research, employee development, and basic innovations – in order to pump up profits so they can dump the company back on the stock market at a big profit.
What’s the answer? At the very least, stop giving tax financial entrepreneurs huge tax advantages over product entrepreneurs. Treat their compensation as income, not capital gains. And tax their partnerships that go public at the same rate public corporations are taxed.
June 2007
7 posts
The Supreme Court has struck down part of the McCain-Feingold campaign finance law governing so-called “issue ads” that are thinly-disguised endorsements or criticisms of candidates, funded mostly by corporations.
Let’s be clear. Money is polluting American politics as never before. But the central problem isn’t the issue ads. They’re small potatoes relative to the mammoth sums donated directly the the candidates, mostly by big contributors. This coming Friday, presidential candidates will file their fundraising totals for the second quarter of the year. This is where the real action is.
Until the 1960s, presidential candidates were usually chosen in conventions. Then state primaries became the deciding force. Now even the primaries are declining in importance, and the real nominating process is happening elsewhere and earlier — in quarterly reports filed with the Federal Election Commission showing how much money each candidate has raised during the year before the convention.
The quarterly totals tell the big contributors — lobbyists, corporate PACs, corporate executives, and partners of large financial firms — where the smart money is going, and they follow with their own money because in this race no one wants to be left behind. It’s a self-fulfilling prophesy , a bit like investments in commodity futures. Hog bellies, soybeans, and presidential candidates — the dynamic is similar. By placing their bets early and accurately, these investors secure a seat at the winner’s table. This means special access and influence, or at least the appearance of such, which is almost as useful.
The incipient 2008 presidential election is already turning out to be the most expensive in history. And although the campaigns trumpet how many small donors they’ve rounded up, the leading candidates in both parties are relying mostly on big donors, according to the Center for Responsive Politics.
What to do? This Supreme Court will continue to use the battling ram of the first amendment to protect the rights of the rich and the corporations in order to mute the voices of the rest of us. So the real question is how to avoid the Supreme Court’s wrath while at the same time putting real limits on the power of money in elections. The best idea I’ve heard is from Bruce Ackerman of Yale Law School. Essentially, he wants to require that all contributions be put in blind trusts for each candidate, so candidates can use the money but cannot know who contributed what.
Get it? This way, the fat cats can support whomever they want and their first amendment free speech rights are protected. But no one gets a seat at the winner’s table because the winners won’t know who they’re beholden to.
Worried about American competitiveness? Worry about our schools. The No Child Left Behind Act was supposed to fix our broken system of K-12 education by setting higher standards and requiring lots of tests. The White House is pushinig for Congresss to reauthorize the Act (unless it does so, the Act expires in September), but the K-12 system’s still broken.
Of course, some testing is necessary to measure whether students are learning. When I went to high school in the last century, I had to take the New York State Regents exams once a year in every major subject. I hated them, but at least they showed what had sunk into my thick head.
But the No Child Left Behind Act has overdone it – turning our nation’s classrooms into test-taking factories where the curriculum is how to take tests rather than how to think. Teachers across the country are complaining that originality and creativity have been drained from classrooms. Now, it’s all about cramming for innumerable tests. The emerging economy needs critical thinkers, not good test-takers.
The other thing we know about successful classrooms is they require talented and dedicated teachers. That’s the other problem with the Act. It hasn’t included enough money to pay salaries needed to attract the best and brightest into K through 12 teaching – especially into classrooms populated mainly by poor and working-class kids.
When I went to school back in the middle decades of the last century, talented women didn’t have many career paths other than becoming teachers. But then American society changed, and women could become almost anything they wanted to be. As a result, between 1964 and 2000, the share of college-educated women who chose a career in teaching dropped from 50 percent to just 15 percent, according to government data. (Of course, the number of women graduating from college also increased dramatically over this interval.)
Many men as well as women go into teaching for its non-monetary rewards. But that doesn’t mean monetary rewards are irrelevant. The law of supply and demand is not repealed at the school house door. If we want talented people in our classrooms we have to pay for them. The overseers of financial capital – investment bankers and private-equity partners – are raking in millions, but the overseers of our most precious human capital, our children, are barely keeping up with what they earned decades ago, adjusted for inflation.
Congress should reauthorize the No Child Left Behind Act but it should cut back on the tests, and include more money for teachers. At the same time, teachers unions have to take responsibility for ensuring high quality in the classrooms. If teachers want higher salaries, the unions are going to have to accept merit pay. Indeed, that’s the whole point. Great teacher should be generously rewarded. But that also means lousy ones should be sacked.
With the bond market dropping and the bull market slowing, hedge funds and private equity funds are all the rage on Wall Street, and their managers are raking in fortunes. These funds are so unregulated they can get high returns from risky deals unavailable to mutual funds or publicly-traded companies. And with lots of money sloshing around the global economy, those risky deals don’t seem all that risky. But what happens when the bottom falls out?
It’s one thing if wealthy investors lose the shirts off their backs. They still have plenty of freshly-ironed ones in the closet. In fact, the argument for not regulating hedge funds and private equity funds is that their investors are big enough and tough enough to take care of themselves.
But corporate and government pension plans are increasingly investing in these funds, with money that was previously invested conservatively on behalf of their beneficiaries. Some states are now putting 20 percent or more of public employee pension savings into them. Corporate pension plans, as much as 40 percent of employee savings. But the individuals counting on retirement checks are neither big enough nor tough enough to take care of themselves.
Few if any pension plan managers have any idea of the specific risks they’re taking –because hedge funds and private equity funds don’t have to disclose them. And the people whose pensions are at stake – teachers, policemen, civil servants, and other working Americans – haven’t a clue.
The fact is, there’s no free lunch, folks. High rewards coming from high risks are vulnerable to high losses. Diversification is wise, but there’s no escaping Newton’s Law: What goes up eventually comes down. Even after the fall, hedge and private equity managers will be able to retire with the fortunes they’ve amassed. But the rest of us may not even get what we’re owed. Message to the rest of us: At least call your plan manager and find out how much of your savings are being invested in hedge funds and private equity
The best idea I’ve heard so far to deal with global warming is not a carbon tax. I can’t imagine any politician calling for higher taxes affecting the middle class, or for that matter the middle class – already squeezed by high energy prices and stagnant wages – putting up with it.
The winning idea isn’t a cap-and-trade system, either. That system would allow companies to continue polluting, just require them to buy the right to pollute more from companies that keep their dirtying to a minimum. Today’s biggest polluters – those who’ve done least to reduce their emissions – would be the biggest winners because they’d get the highest caps.
The best idea I’ve heard is described as a carbon auction. Companies would have to bid for the right to pollute. And, most ingeniously, the money raised in the auction would be shared equally by all citizens in the form of yearly dividend checks – just like the residents of Alaska now get yearly dividends for their share of the state’s oil revenues.
I mean, it’s our atmosphere, right? Think of a national park or a national forest. No company is simply allowed to take what they want from it, free of charge. Why should the atmosphere be any different?
In a carbon auction, companies would have to bid against other companies for a portion of the atmosphere they intend to use – within overall limits that reduce pollution levels.
Get it? It’s a win-win. The auction market itself determines who can pollute and by how much. And since companies will inevitably want to reduce their bidding costs, they’ll search for new technologies that cut their emissions.
And even if companies pass on increased costs to their customers, we’ll still be better off because we’ll get dividend checks and cleaner air.
Message to presidential candidates: American voters will buy this one. And it’s good policy.
When my passport was stolen at the end of March, I applied for a new one – sending the necessary forms to the passport office along with the mandatory $97 filing fee. I was planning to travel to Canada in mid June but that didn’t worry me because the passport office’s web page assured me that a new one would arrive in 6 weeks, 8 weeks maximum.
Nine weeks later and still without a passport, I phoned the local passport office. I should say, I tried to phone. No one answered. So I tried the national passport line in Washington and got a recording saying that due to “unprecedented” volume they could serve me only if I was leaving the country within two weeks. I qualified, but that hardly seemed to matter. I was patched through to a 24-hour automated line that informed me I couldn’t be connected because of the high volume of calls and advised me to call back at night, then hung up. I phoned back that night but no one answered.
In the meantime, I learned from a friend about a private company that sped up the process by hand-delivering passport applications to appropriate government offices, but that would cost another hundred bucks and mean starting the process all over again. Trying to control my rising anxiety, I phoned my representative in Congress and finally got through to a sympathetic human being who said they were getting a lot of calls about passports. She’d do what she could.
Apparently it’s been like this ever since a new law went into effect last January requiring passports for Americans returning by air from Canada, Mexico, Bermuda, and the Caribbean. The State Department reportedly hired “dozens” of new workers to process the anticipated flood of applications, which is laughable. They didn’t need dozens; they needed thousands.
Late last week, faced with rising tempers, the government announced a temporary suspension of the new passport requirement. To go to Canada next week, all I need is proof I’ve applied for a passport. But when I went online to get the proof, there was a notice saying it’s taking a week for passport applications to be tracked online.
I don’t know whether I’ll get to Canada, but I doubt any of this has made it harder for terrorists to enter America. All we’ve done is make it harder for Americans to leave.
PS: I belly-ached about my passport woes on public radio’s “Marketplace” this past Wednesday. On Thursday, I got a call from the Office of Public Affairs of the State Department, telling me they’d get to work on my passport. Today (Friday), my passport arrived in the mail. Lesson: If you’ve got a problem that needs fixing, all you need do is complain about it on public radio.
A century ago, America’s immigration policy was best summarized in Emma Lazarus’s famous lines on the Statue of Liberty, “Give me your tired, your poor, your huddled masses yearning to breathe free….” I’m afraid that under the immigration bill now pending in Congress, it will be “Give me your rich, your well-educated, your young high-tech moguls yearning to make even more money.”
Supporters of this fundamental change in immigration policy say we need to import well-educated talent if we’re to stay competitive.
But exactly whose competitiveness are we talking about? Not the competitiveness of, say, American-born computer engineers. Adjusted for inflation, their earnings haven’t gone anywhere in years. That’s in part because American companies have been sending so much of their high-tech work abroad. Bringing more foreign-born engineers here – under an expanded H1-B visa program or a point system, for that matter – will just depress wages even further.
Some argue that even with all the outsourcing, we still don’t have enough well-educated high-tech workers here in America. But this mixes short-term and long-term logic. You’d expect any shortage of talent in America would force companies here to raise salaries sufficiently to induce enough Americans to get the skills in demand. Yet if those companies are allowed to import more high-tech workers, they won’t need to raise American salaries. Which means fewer young Americans will be attracted into these careers – thereby creating a self-fulfilling prophesy of too few native-born Americans to fill them.
Taking the pressure off American companies like this also means taking the pressure off them to help fix America’s broken educational system, in which American kids now place last in math and science among young people in all advanced nations.
Don’t get me wrong. I’m all in favor of immigration. Our country was built on it. But I worry about bringing in well-educated people with high-tech skills when we’ve failed to give enough Americans a good education, or pay those who have it what they deserve.
