Category Archives: Business

Bigotry and Disenfranchisement: Making Sense of Trump Supporters’ Motivations

Like many other people, Jesse Soza has spent a lot of time thinking about what might have motivated Donald Trump’s supporters to vote for him. Soza, a former classroom teacher, discusses the complementary nature of bigotry-based and economic explanations in this post.

soza_jesse

Jesse Soza

“We must learn to regard people less in the light of what they do or omit to do, and more in the light of what they suffer.” – Dietrich Boenhoeffer

In the past couple of weeks, the American public has been flooded with a variety of attempts at rationalizing Donald Trump’s unlikely victory over Hillary Clinton. What has struck me is that in almost every piece that I have read, explanations tend to fall into one of two categories. On one side, explanations revolve around the extreme racism, sexism, homophobia, anti-Semitism, and Islamophobia that Trump was able to bring out of his supporters. On the other side, various pieces point to Trump’s ability to speak to a large population of Americans who are experiencing high levels of social, political, and/or economic disenfranchisement.

As each side continues to attempt to validate its case as a way to legitimize or delegitimize Trump’s victory, it has become clear that rational discussion between these groups has reached an impasse. Due to the incredible amounts of emotion tied to this issue, it is not a surprise to see each side making its argument with little to no consideration of the middle ground. The fact that each side has dug in behind its respective strawman argument means that the critical dialogue necessary to begin repairs to American society is unlikely to occur. Such dialogue can only begin when each side is willing to believe that there is some validation in the other’s stance.

With that in mind, the following is my attempt to validate both explanations for how America has reached this point, and to explain how they’re connected. Others, typically in the Bernie Sanders wing of the Democratic Party, have made similar points about the links between bigotry and a political and economic system that has left millions of Americans behind.  But as I believe a failure to call out bigotry is the most glaring problem in this debate, my focus will be on the undeniable role it has played in this election.

A Historical Commonality

Throughout the course of history, racism, homophobia, sexism, xenophobia, etc. and social, economic, and/or political disenfranchisement have been inexorably linked. Over and over again, we see that humans find scapegoats when times get tough, and those scapegoats have often been vulnerable groups within a population. Think about what happened to the Jews in Nazi Germany, the Tutsis in Rwanda, or the Armenians in the Ottoman Empire. Acts of violence towards these groups provided perpetrators with a sense of regaining control and power where there had previously been none or the belief of losing it. Such acts did not actually improve the situation of the disenfranchised, but given their relative lack of persecution, some may have felt better off. The fact that this cause-effect relationship between social hardship and the targeting of vulnerable groups is so prevalent throughout history necessitates a critical examination of current events in America to see if there are similarities. (Spoiler Alert: There are.)

If social and mainstream media’s statement of economically and politically disenfranchised groups is true (which it undeniably is), we must acknowledge what that means at a deeper level: If conservative America considers themselves disenfranchised, they almost assuredly harbor deep anger, resentment and frustration. Whether this anger stems from economic difficulties, political disenfranchisement, or a more deep-seated resentment of the move away from conservative White values (likely a combination of all three for most Trump supporters), it is now clear that there was a powder keg of emotional turmoil hidden within conservative America.

I will admit, at the beginning of this election, that I, like many others, was woefully unaware of the degree to which people were angry with the system. Did I see frustration? Yes. But did I truly know that so many Americans had such deep feelings of alienation? No. The results of the election have shown that the magnitude of anger and frustration residing within many Americans was significantly higher than many of us predicted. How did so many people miss it?

I think such large numbers of people failed to predict the level of anger residing in conservative America because, until recently, that anger had no guided direction. Without a unified bearing, such feelings were hidden behind a veil of superficial civility and tolerance. Sure, we’d see random acts of violence and injustice from hyper-racist groups or individuals, but never did we believe that America’s problems with race, religion, sexual orientation and gender would become a national crisis. Shame on us. We became numb to the signs, and thus somewhat indifferent, to the potential for something much bigger and far more dangerous as a result of what was seeded within our nation. Because we failed to fully realize how strongly conservative America believed that they were losing their nation economically, politically, and socially, no major attempts were made to address the ticking time bomb of anger and resentment that stayed more or less under the radar as these Americans waited for someone who might empathize with their plight and give them direction.

Enter Donald Trump

One of the most common criticisms of Trump is that he never really explained how he was going to actually do anything he was promising. But I now believe that appealing to logic in terms of political action was never what he intended to do. Where I used to chalk up his lack of logic to incompetence, I now have to believe that it was his game plan. Trump’s talent resided in his ability to elicit emotional responses. Early on, he recognized the anger and frustration that was bubbling in the hearts of many Americans (both Democrats and Republicans) and knew that if he could tap into that, he’d get all the support he needed. The question was how he would do it.

Through his speeches, actions and promises, he stoked the emotional fires of those who felt they had been pushed aside by the economy, government and the rest of American society. In doing this, Trump knew that he could win the hearts of his constituency. He provided the age-old answer to “who/what is to blame,” thus giving all their anger and resentment direction and solidifying his status as “the answer.”

That, by itself, wouldn’t have necessarily been a bad thing, as almost all strong leaders find some way to tap into the passion of their people and give that passion direction. However, in a reprehensible move, Trump, like so many despots of the past, chose to use fearmongering as the way to achieve this end. He successfully created and fostered the notion that there were enemies among us, implying that if we were to defeat these enemies, America would be great again. Trump’s 21st-century answer to America’s plight was to dehumanize Mexicans, Muslims, Black people, LGBTQ individuals, Jews, and women, painting immigrants in particular as the source of our woes. Historically speaking, when humans are labeled as impediments to progress, the corresponding social response sets a very dangerous precedent. It is frightening to think about what America is already flirting with, especially considering that Trump and his values have not yet officially taken office.

Trump’s bigotry and lust for power have played a primary role in stoking the anger and resentment that has been brewing in conservative America. Furthermore, he knowingly chose to funnel that anger towards vulnerable people. For that, Trump must be held accountable. We must acknowledge that the surge in overt bigotry America is currently experiencing is a direct effect of how Trump chose to run his campaign. Instead of calling for unity and working together as we overhaul a system that has disenfranchised many Americans (regardless of party affiliation), Trump chose to create and lead a modern day witch hunt. And like so many people in the past, a significant portion of downtrodden, resentful and angry Americans have attached themselves to a charismatic leader who is selling the idea that ultra-nationalistic bigotry will be the answer to their anguish.

Yes, Donald Trump spoke to the groups of people who felt that the economy and government weren’t on their side. Yes, he did unexpectedly well because his message was one of reforming a broken system. But we must remember how he framed his message of change. The change he promised was undeniably tied to racism, sexism, homophobia and xenophobia, those hateful –isms (and –obias) that have acted as foundations of this country since it was established. He stoked the fires of bigotry and anger without regard for the consequences of his actions simply because he knew that it would draw people to him. For too many Americans, he galvanized the idea that there are people within this country who deserve ire and intolerance. His campaign has not only emboldened individuals to practice injustice towards others, it has legitimized such behavior as a patriotic means of “making America great again.”

Donald Trump is dangerous. While I doubt he’ll be able to do even half of what he promised (though you should take that with a grain of salt, as I had similar doubts about him becoming president), the real danger lies in his capability to foster feelings of hatred and bigotry within a distressed conservative America while disguising such acts as patriotic. As a leader, he will continue to divide the American people and feed into the false notion that acts of injustice and dehumanization will lead to a better, more recognizable home for disenfranchised Americans. Due to his position, charisma and the fact that so many Americans are desperately looking for an answer to their perceived troubles, people will believe him.

Donald Trump has, without question, made it to the White House by painting both our fellow Americans and fellow human beings as what is wrong with America. In doing so, he has effectively made them targets for discrimination, oppression and dehumanization. Furthermore, the nature of his campaign has played a primary role in giving tacit approval for Americans to oppress each other.

Moving Forward

We must acknowledge the reality that Donald Trump has and will continue to encourage acts of injustice. To deny that or mask it with a neutral stance would be ignorance at its worst. Whether we see new discriminatory policies or other citizens who have bought into Trump’s misguided message that bigotry is the right course for America, we must get outraged and intervene. We cannot stand idly by if the rights and humanity of others are in jeopardy.

We also have an obligation to try to understand why so many people voted for Trump. Though the common idea that such a decision was made not because of racism, sexism, or other forms of bigotry but in spite of them may strain credulity for some of us, we must consider that possibility and the possibility that, even in cases in which an –ism was the primary driver of a Trump vote, that -ism is deeply connected to a system that isn’t working. We can continue to straw man our respective arguments by oversimplifying answers or we, as a unified American society, can try to reach out in an attempt to acknowledge and appreciate the deep-seated pain and anguish that are currently feeding American anger and resentment.

The task before us is immense, possibly necessitating one of the largest social movements in American history. It is made more difficult by the fact that we have a charismatic individual coming into office who knows how to harness, incite and utilize social anger to his advantage. Still, acknowledging these things means we may have a fighting chance of pushing back against the tide. We know what the problem is: Anger stemming from pain. The solution: Love, compassion and understanding.

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Filed under 2016 Presidential Election, Business, Race and Religion

The Sound Reasoning Behind a $15 Minimum Wage

The New York Times Editorial Board recently endorsed a $15 federal minimum wage.  A proposal at the federal level would phase in $15 an hour in small increments over a period of several years and would still, as the Times mentions, set a wage floor in 2020 below what most low-wage workers need to provide for their families.  Yet Slate’s Jordan Weissmann believes that “the argument in favor of a $15 federal minimum is…extremely weak,” and that the endorsement is “emblematic of a progressive movement that has fixated on a much higher minimum as the answer to the problem of low-wage work while refusing to grapple with the potential downsides.”

Weissmann supports a federal minimum wage above $10 an hour and possibly in the $12 an hour range; like Alan Krueger, one of the economists who authored some of the landmark research on the minimum wage, his argument against $15 surely comes from a good place.  His assertions are substantively wrong, however; proponents of a $15 federal minimum have grappled with the points he makes and have decided that the case for a $15 federal minimum is actually much stronger than Weissmann’s.

The crux of Weissmann’s argument is that, “if the government forces wages too high, businesses will eventually cut back on hiring.”  $15 would be “too high,” he argues, because it is higher than “historical and international norms.”

Weissmann is correct to note that a $15 minimum wage would affect a larger share of low-wage workers in Little Rock, Arkansas than in Seattle, Washington, where a minimum wage increase to $15 an hour is already being phased in.  He is also correct to note that the research literature on the minimum wage largely speaks to moderate increases in the minimum wage, not to what might happen if it were increased to $15 an hour.  Proponents of a $15 minimum wage know these facts; they just don’t agree that they’re disqualifying.

The thing is, opponents of the minimum wage have been claiming for years, based on flawed but standard economic theory, that the mere existence of a minimum wage will kill jobs.  A huge body of research over the past twenty years has shown that these arguments are wrong: most studies suggest that the minimum wage has negligible effects on employment, and while there are credible studies that find small negative employment effects, there are also alternative theories out there, and a few findings to back them up, about why a higher minimum wage could, in some cases, actually lead to more employment.  Not having research about what would happen at $15 does not mean that it would cost jobs – it just means that, if we go to that level, we can’t be certain that the minimum wage’s opponents will continue to be so wrong about its effects on the job market.

Whether you think $15 will pose an employment problem is thus a matter of conjecture.  Weissmann is entitled to his beliefs, but it’s worth highlighting that a) the proposed increase is phased in in increments, giving businesses time to adjust, b) corporate profits are near all-time highs (as is executive compensation), suggesting that most businesses that employ low-wage workers can easily absorb the labor costs (one recent analysis of the fast food industry even suggests that firms could absorb a $15 minimum wage without a reduction in profits), c) Weissmann’s arguments mirror those of the minimum-wage-increase naysayers who have repeatedly been wrong, d) Weissmann’s summary of the evidence from Puerto Rico is woefully incomplete; a more thorough look does not actually support his case, and e) even economists, who typically lean towards embracing standard but flawed supply-and-demand theory, have split opinions on what might happen under a gradually phased-in $15 federal minimum wage.*

The fact that a $15 federal minimum wage would affect more workers in Little Rock, Arkansas than in higher-wage states can also be viewed as an argument in favor of larger increases in the minimum wage – they provide more help to a larger number of low-wage workers who are struggling to get by!  As Weissmann himself acknowledges, it takes around $20 an hour for a single parent to raise a child even in states with the lowest costs of living.  He gives surprisingly short shrift to the huge risk in not raising the minimum wage high enough: that it will lock in insufficient income support for millions of low-wage workers who desperately need additional money.  The fact that the nationwide movement for $15 has been driven by the very workers who would be affected by the policy change suggests strongly that they view the definite downside posed by a lower minimum wage – less compensation for their hard work – as a whole lot scarier than the indefinite possibility that $15 might cause some reductions in employment.  The argument against $15 could theoretically be used to reject every bold new policy proposal that helps people; it’s really hard to make progress if you don’t push past historical and international norms every so often.

In addition, while I applaud Weissmann for his concern about low-wage workers being able to find jobs, advocating against higher wages for millions of people is an odd way to address this concern.  The minimum wage does not exist in a vacuum; it is one policy among many that can be used to help low-wage workers.  While Weissmann correctly notes that the Earned Income Tax Credit and minimum wage are complementary, he fails to consider whether direct job-creation programs and/or policy that addresses firms’ decision-making in response to minimum wage increases could complement the minimum wage as well.

So while Weissmann thinks the New York Times underweights the potential and unknowable risk of heretofore unseen levels of job loss, I believe (along with hundreds of economists) that he underweights the immediate, definite risk of keeping the minimum wage too low.  I encourage him to, at the very least, consider policy tools that can mitigate his concerns without depriving low-wage workers of much-needed income.

*Update (1/5/16): It’s also worth noting, as minimum wage expert Dave Cooper has reminded me, that “the fear of a negative impact on jobs is a bit too simplistic. The concern is that the higher minimum wage could reduce the total aggregate work hours among low-wage workers, but even if that occurred, those workers would still be better off if, even while working fewer hours, the higher hourly wage caused their annual earnings to rise.”

Correction (1/25/16): The original version of this post misspelled Weissmann’s name.

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Filed under Business, Labor

Hillary Clinton’s Less than Stellar Record on Trade

In this post, Part 4 in a series on Democratic presidential candidate Hillary Clinton, Emilio da Costa describes Clinton’s record on international trade and business issues. Emilio, who holds a master’s degree in City and Regional Planning from Berkeley and a bachelor’s degree in Urban Studies from Stanford, can be contacted on Twitter or by email.

Emilio da Costa

Emilio da Costa

During her career in government, Hillary Clinton has routinely prioritized the interests of corporate profiteers while neglecting the rights of workers. Her support of so-called “free trade” agreements in particular illustrates where her priorities lie.

While in the Senate, for example, Clinton backed agreements with Chile, Singapore, and Oman despite their clear lack of labor protections. As David Sirota and Matthew Cunningham-Cook reported for the International Business Times:

At the time, the AFL-CIO said, “The labor provisions of the Chile and Singapore FTAs will not protect the core rights of workers, and represent a big step backwards.” The union federation also opposed the deal with Oman. Its president, John Sweeney, noted that “the State Department has identified Oman as a destination country for men and women who become victims of  trafficking and forced labor.”

In some cases, Clinton even directly worked against improved labor standards for workers in other countries. In a piece for The Nation, Dan Coughlin and Kim Ives utilize content from cables obtained by WikiLeaks to describe how Secretary Clinton’s State Department lobbied the Haitian president to help multinational clothing retailers undermine a minimum wage increase unanimously passed by the Haitian Parliament:

Contractors for Fruit of the Loom, Hanes and Levi’s worked in close concert with the US Embassy when they aggressively moved to block a minimum wage increase for Haitian assembly zone workers, the lowest-paid in the hemisphere, according to secret State Department cables.

The factory owners told the Haitian Parliament that they were willing to give workers a 9-cents-per-hour pay increase to 31 cents per hour to make T-shirts, bras and underwear for US clothing giants like Dockers and Nautica.

But the factory owners refused to pay 62 cents per hour, or $5 per day, as a measure unanimously passed by the Haitian Parliament in June 2009 would have mandated. And they had the vigorous backing of the US Agency for International Development and the US Embassy when they took that stand.

To resolve the impasse between the factory owners and Parliament, the State Department urged quick intervention by then Haitian President René Préval.

“A more visible and active engagement by Préval may be critical to resolving the issue of the minimum wage and its protest ‘spin-off’—or risk the political environment spiraling out of control,” argued US Ambassador Janet Sanderson in a June 10, 2009, cable back to Washington.

Two months later Préval negotiated a deal with Parliament to create a two-tiered minimum wage increase—one for the textile industry at about $3 per day and one for all other industrial and commercial sectors at about $5 per day.

Clinton’s record is very similar when it comes to the most recent “free trade” agreement – the Trans-Pacific Partnership (TPP). The TPP has been the subject of well-deserved scrutiny, and not just from “liberals” like the Economic Policy Institute’s Robert E. Scott, Senators Elizabeth Warren and Bernie Sanders, and former US Labor Secretaries F. Ray Marshall and Robert Reich. Former US Treasury Secretary Larry Summers, the economist famous for, among many things, his role in the deregulation of the US financial system, has also raised doubts about the merits of the agreement. Here’s Summers in a surprisingly populist op-ed for The Washington Post:

First, the era of agreements that achieve freer trade in the classic sense is essentially over. The world’s remaining tariff and quota barriers are small and, where present, less reflections of the triumph of protectionist interests and more a result of deep cultural values such as the Japanese attachment to rice farming… A reflexive presumption in favor of free trade should not be used to justify further agreements. Concerns that trade agreements may be a means to circumvent traditional procedures for taking up issues ranging from immigration to financial regulation must be taken seriously…

[The US economy] has supported the greatest economic progress in the history of the world in emerging markets and is working spectacularly well for capital and a cosmopolitan elite that moves easily around the world. But being pressed down everywhere are middle classes who lack the wherewithal to take advantage of new global markets and do not want to compete with low-cost foreign labor. Our challenge now is less to increase globalization than to make the globalization we have work for our citizens.

In that respect, the TPP doesn’t look good. Scott discusses how free trade has historically depressed US wages and why the lack of enforceable currency provisions in the agreement could lead to job losses. Reich and Marshall caution that its “patent provisions risk delaying or even preventing generic competition, thus keeping lifesaving medicine out of patients’ hands.” Warren details how the agreement’s Investor State Dispute Settlement (ISDS) provisions “would allow big multinationals to weaken labor and environmental rules” and why, despite the fact that the “TPP is being hailed as the strongest free trade agreement yet,” our terrible enforcement record when it comes to previous agreements (and the same empty promise being made over and over again) belies that claim.

What does all of that have to do with Clinton? As Sirota and Cunningham-Cook note, Clinton was a strong supporter of the TPP during negotiations:

In a 2012 speech in Australia, Clinton referred to TPP as “the gold standard in trade agreements to open free, transparent, fair trade, the kind of environment that has the rule of law and a level playing field. And when negotiated, this agreement will cover 40 percent of the world’s total trade and build in strong protections for workers and the environment.”

But that was just one speech, right? Wrong.

In a 2012 speech in Singapore, Clinton explicitly promoted the TPP as an initiative that “will lower barriers, raise standards, and drive long-term growth across the region.” She also used the collective “we” in describing the work being done on the pact, saying, “we are making progress toward finalizing a far-reaching new trade agreement called the Trans-Pacific Partnership.” She also said “we are offering to assist with capacity building, so that every country in ASEAN can eventually join.” The video of the key part of her speech can be seen here:

In fact, even CNN, which judging from the recent Democratic primary debate seems to unabashedly favor Clinton, published an article listing 45 times that Secretary Clinton pushed the very trade bill that she now claims to oppose.

Her flip-flop, as Sirota and Cunningham-Cook note, is typical:

Clinton has a history of abruptly changing positions on trade policy. When running for president in 2008, she criticized the North American Free Trade Agreement, despite reports that she supported it while her husband was president. Clinton also pledged to oppose a proposed free trade agreement with Colombia. Only two years later, as secretary of state, she backed that deal while her family’s foundation received money from a Colombian oil firm and its founder.

Though she has tried to justify her reversal this time around, her claims are unconvincing. As Tim Lee explained at Vox:

In the interview with PBS’s Judy Woodruff where she came out against the treaty, she cited two specific objections: It doesn’t have language dealing with currency manipulation, and it has provisions that favor big drug companies over patients.

These are totally plausible arguments for opposing the TPP. But they make no sense as reasons for Clinton to change her mind about the treaty.

Why not? Because, as Lee describes, the “pharmaceutical language in the TPP is better than expected” and “currency manipulation was never going to be part of the TPP.”  If Clinton was serious when she lauded the “gold standard” TPP for “free, transparent, fair trade” in 2012, she should be even more supportive of the deal now.  Instead, the minute that the TPP became widely unpopular, she changed her position, saying that it didn’t meet the “high bar” she had set for it.

I can only draw three logical conclusions from these remarkable contradictions:

  1. Clinton had not read the TPP prior to making her “gold standard” statement and was blindly supportive of it.
  2. She did read it, and she honestly believed what she said in 2012, but is now willing to falsely appear critical of it.
  3. She did read it, her statement in 2012 was a total lie, and now it’s in her interest to lie again and appear concerned.

Unfortunately, none of these conclusions give me any reassurance that it would be a good idea to entrust Clinton with more political power.

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Filed under 2016 Presidential Election, Business, Labor, US Political System

What It Means to be Tough on Wall Street

I nearly spit out the hard apple cider I was drinking when I heard the following exchange during the first Democratic presidential debate:

Anderson Cooper: Senator Sanders wants to break up the big Wall Street banks. You don’t. You say charge the banks more, continue to monitor them. Why is your plan better?

Hillary Clinton: Well, my plan is more comprehensive. And frankly, it’s tougher…

Sure, Clinton’s plan has, as financial systems expert Mike Konczal notes, significantly more “footnotes and wonky details.”  If that’s what “more comprehensive” means, so be it.  But tougher?  More “characterized by severity or uncompromising determination,” as Merriam-Webster’s puts it?

To me, the best, most concise summary of the two candidates’ plans for Wall Street banks thus far comes from former US Labor Secretary and current Berkeley professor Rob Reich:

Bernie Sanders says break them up and resurrect the Glass-Steagall Act that once separated investment from commercial banking.

Hillary Clinton says charge them a bit more and oversee them more carefully.

Which of those options sounds tougher to you?

Konczal also highlights that Sanders, unlike Clinton, “wants to take on the power of the big banks.”  In addition, the two candidates’ approaches to curbing high-frequency trading “is a clear difference, with Sanders taking a more aggressive approach.”

Clinton didn’t possibly expect anyone to believe that she’d be tougher on Wall Street than Sanders, did she?

Imagine my surprise upon opening up a recent Paul Krugman article – expecting the excellent economic and political analysis he so often provides – and seeing that, in the candidates’ dispute “about whose plan was tougher,” he thought “Mrs. Clinton had the better case.”

Krugman points out, as does Konczal, that while Clinton has already laid out details on how she plans to conduct oversight of the “shadow” banking sector, Sanders hasn’t.  Krugman sees a specific plan in this area as more important than a commitment to break up the big banks.  This argument is fine to make, though it’s worth noting that Reich disagrees.

But the more important topic, Krugman argues, is tough-on-Wall-Street credibility.  And what’s baffling to me about his analysis is that he seems to think Clinton has it, a position completely at odds with the campaign finance data and Clinton’s record.

The crux of Krugman’s argument is that, while “there was a time when Wall Street and Democrats got on just fine…with the securities industry splitting its donations more or less evenly between the parties,” that time has passed.  He writes:

[I]f Wall Street’s attitude and its political giving are any indication, financiers themselves believe that any Democrat, Mrs. Clinton very much included, would be serious about policing their industry’s excesses. And that’s why they’re doing all they can to elect a Republican…

Financial tycoons loom large among the tiny group of wealthy families that is dominating campaign finance this election cycle — a group that overwhelmingly supports Republicans. Hedge funds used to give the majority of their contributions to Democrats, but since 2010 they have flipped almost totally to the G.O.P.

As I said, this lopsided giving is an indication that Wall Street insiders take Democratic pledges to crack down on bankers’ excesses seriously. And it also means that a victorious Democrat wouldn’t owe much to the financial industry…

Krugman is right about the overall trends.  A tiny group of wealthy families is contributing millions of dollars to 2016 presidential campaigns, most of it to Republicans, and the balance of hedge fund donations between the two parties has definitely shifted.  But those overall trends mask one crucial exception to the rule: Hillary Clinton.

The Center for Responsive Politics collects data on donations campaigns receive from individuals who work in the “Securities & Investment” industry, which is shown below.  While the organization recognizes that “not every contribution is made with the donor’s economic or professional interests in mind[, there is] a correlation between individuals’ contributions and their employers’ political interests.”  In addition, the “donors [they] know about, and especially those who contribute at the maximum levels, are more commonly top executives in their companies, not lower-level employees.”

Securities & Investment Chart - Updated

As the chart shows, Clinton actually leads all Republican candidates in contributions from this industry.  She has received over 40 times more money than Sanders has from individuals associated with Wall Street.  That’s lopsided giving all right, but it’s lopsided in a much different way than Krugman suggests.

Candidates receive considerably more financial support from Super PACs than from individual donations, but Clinton ranks among the Republicans in this category, too.  Jeb Bush, Ted Cruz, and Marco Rubio outpace her (Bush by a considerable margin), but her $20.3 million in Super PAC money is exactly $20.3 million more than Sanders has received.  While it’s not clear how much of any candidate’s Super PAC money comes from Wall Street, and while I suspect that Clinton Super PAC donors George Soros and S. Donald Sussman are more amenable to basic regulations than their fellow billionaire hedge fund managers who donate to Republicans, it seems plausible that a “victorious Democrat” – if that Democrat were Hillary Clinton – might, in fact, “owe much to the financial industry.”  And that’s before even considering donations to the Clinton foundation.

Super PAC Donations

Those donation profiles suggest that Sanders, despite not having a specific proposal on “shadow” banking yet, is far more likely than Clinton to fight for smart recommendations from folks like Konczal.

I find it especially hard to understand Krugman’s argument in the context of what Clinton touted as a tough-on-Wall-Street credential during the debate:

I represented Wall Street, as a senator from New York, and I went to Wall Street in December of 2007 — before the big crash that we had — and I basically said, “cut it out! Quit foreclosing on homes! Quit engaging in these kinds of speculative behaviors.”

I don’t know about you, but I don’t typically think representing a group of rich people and giving them a nonbinding but stern talking to qualifies as particularly tough.  History backs me up on this one – Clinton’s Wall Street lecture doesn’t seem to have worked out so well.

Paul Krugman is a great economist, I love his column, and I understand the point he’s trying to make: he thinks a Democrat in the White House – any Democrat – would be a hell of a lot better than any Republican.

But even if you agree on that point, don’t buy the idea that the practical difference between Clinton and Sanders is trivial.  It’s very large when it comes to Wall Street, where Sanders is tougher by any reasonable definition of the word.

Note (10/22/15): I updated this post with new data from the Center for Responsive Politics; the old graph, which appeared in the original version of this post, is shown below.  At that time (as the original version of the post noted), Sanders had “received so little from the Securities & Investment industry that the Center for Responsive Politics [didn’t] even report it.”

Securities & Investment Donations

Update (5/12/16): The Wall Street Journal reports that “Hillary Clinton is consolidating her support among Wall Street donors and other businesses ahead of a general-election battle with Donald Trump, winning more campaign contributions from financial-services executives in the most recent fundraising period than all other candidates combined.”  In addition, “some Wall Street donors have shifted their financial support from Republican candidates who dropped out of the race, such as former Florida Gov. Jeb Bush and Florida Sen. Marco Rubio, to Mrs. Clinton in recent months.”  The most recent data from the Center for Responsive Politics, shown below, includes both donations made directly to the campaigns and those made to candidates’ Super PACs.

Wall Street Donations 4-21-16.png

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Filed under 2016 Presidential Election, Business

Big Pharma: Don’t Hate the Player, Hate the Game

Martin Shkreli is a man I admire in an odd sort of way.

The recent controversy involving Mr. Shkreli and his price hike of the toxoplasmosis drug, Daraprim, seems to have caused misguided furor towards the 32-year-old CEO of Turing Pharmaceuticals. He may epitomize a major problem with the pharmaceutical industry but he is simply playing by the rules his pharmaceutical executive contemporaries and predecessors have helped set in place. Much like Donald Trump and his history of bankruptcies, he’d be foolish not to take advantage of every oversight weakness or loophole set up by a corrupt system that affords advantages to those who are shrewd enough and willing to exploit them. The public’s anger is directed at the man and not the system.

If Shkreli were to step down or be forced to resign, do people think that the next CEO of Turing Pharmaceuticals won’t be as zealous or brash in exploiting the system? People dislike him for the price hike, but loathe him for the way he defiantly acted in response. If I were a board member I would demand that my CEO rigorously investigate every pathway to make the company more profitable and therefore more financially stable, but I would also want them to exhibit a measure of temperance so as not to attract unwanted public spotlight. It seems as though people would be willing to forgive and forget a less brazen pharmaceutical executive. Every public dollar not claimed by Turing Pharmaceuticals is a dollar that will be spent elsewhere, or heaven forbid end up in the coffers of the competition.

As for the relationship to medical students, pharm and biotech industry sales reps are not seen or heard from during the first two years of our schooling. We are in the classroom and there is no official school-sanctioned time allotted to these groups unless specifically invited by a student organization. There are no events or talks sponsored by companies, and all faculty must divulge any real or perceived conflicts of interest when lecturing.

This changes in the clinical years (third and fourth year) when the students are out and about amongst the physicians, nurses, and patients in the hospitals and clinics. Students are left to their own devices and are sometimes in rooms with Big Pharma reps during presentations for a new product or during demonstrations of a new surgical device. The “good” reps will gravitate towards the students after they’ve made their pitch to the higher-ups and start chumming it up with those at the bottom of the totem pole and those with the least decision-making capacity.

My first encounter with a sales rep was right before entering the operating room (OR). Gowned in scrubs, all entrants into the OR look nearly identical and no hierarchy can be discerned readily, like it can be up on the patient floors. There doctors wear long white coats, nurses wear scrubs, and students wear short white coats paired with a look that can only be described as confident confusion. There the pecking order is clear. The OR is murkier—we’re all wearing blue scrubs so the nurses and students are dressed like the doctors are dressed like the students. The man approached me and asked if I was a student and we began chatting. I assumed this guy was of some import—he was tall, he spoke confidently, and he knew everyone’s name entering the OR. As the conversation shifted from what my first few days at the hospital were like, he started extolling the sophistication and ease of use of this new surgical device that would be employed for this particular operation. Then it hit me that this guy was just a salesman.

He knew who I was, right? Him selling me on his product would do absolutely nothing for his company’s bottom line and his quarterly sales wouldn’t see the slightest uptick whether or not he had ever spoken to me. He gave me his card and told me to be on the lookout for his company’s reps in all my future endeavors. Man, I thought, he was such a nice guy. As the weeks went on I encountered other reps while in the hospital. All of who were just as nice. What an endearing industry.

Drexel had done a superb job at shielding its first and second year students from the influences of third party companies. We had almost no exposure to the sales pitches coming out of the mouths of these charismatic salespeople. We were being released to the world as naïve students. Were these reps being nice for the sake of being nice? Of course that’s a possibility. What’s much more probable, however, is that they are all planting the seeds of merchandising as soon as they are able. I wouldn’t be advising any hospitals to buy any new surgical devices, nor would I be prescribing any meds for a few years, but when the time comes, I will already have that brand recognition stored somewhere in my brain.

As students we are never given formal training in how pharmaceutical companies operate and what we can expect to deal with for the rest of our careers, regardless of our specialty. We have a Business of Healthcare course that does a great job of outlining the history of US healthcare, how it came to be the way it is, and how insurance companies fit into the puzzle that is the US healthcare system. I once believed that it was a good thing that med school limited exposure to Big Pharma, and that this limited access to its students would offset some of the pernicious effects of physicians becoming beholden to a drug company. As our system is set up now, students or recent med school grads will be inundated with free luncheons, demonstrations, and gifts that are designed to both inform and persuade physicians and future physicians to prescribe certain medications. There seems to be real value in these demonstrations, as it is a way for those in healthcare to stay current with advances in research and technology.

The FDA and Big Pharma continue to battle about how much free speech the for-profit pharmaceutical companies can claim when marketing their drugs and devices. Students are not given much information regarding the politics of what is going on in Washington, D.C. It is important to learn about how our healthcare system works and to truly be advocates for our patients, doctors need to be versed in the discussions going on in the capital. Perhaps to steer clear of politics and controversy, medical schools opt to leave this discussion out altogether.

Or perhaps not; in order for physicians to best advocate for our patients and their health, we need to know the rules of the game. Med schools need to find the balance between creating competent, knowledgeable physicians who understand their field very well but that are also aware of all of the players in the game and what’s at stake. I’ve found that many of my colleagues find the political aspect of medicine tedious, boring, and too time consuming to delve into the intricacies of policy creation. It is this lack of knowledge or fundamental misunderstanding of the relationship between physicians, pharmaceuticals, and the government that makes doctors more susceptible to persuasion by the sales reps as conflicts of interest in the health practitioner field aren’t readily apparent.

The relationship between pharmaceutical and biotech companies with medical schools shouldn’t be adversarial, but when the goals of the healthcare provider and healthcare-related companies don’t coincide, the physician and the patients need to be made aware. Talks by prominent physicians that are on the payroll of drug companies need to be scrutinized. Papers applauding new breakthrough treatments need to be rigorously investigated because even peer-reviewed journals are not free from bias. There is no ideal time during the course of our education that this information would naturally fit, but it is vital and it should be taught early on so that when we are released into the hospitals we will have practice with critiquing sources and being mindful of current legislature concerning what parties are spending money and where they are spending it. If you set up a system that can be exploited you will attract those that are the best at this exploitation.

It is easy to set the ire and pent up aggravation at a wasteful system onto the figurehead with the likeness of a James Bond super-villian, but the release of the collective frustration still does not change the underlying current of how our healthcare system is run. If we’re not educating future doctors on how to effectively combat an (at best) unfair or (at worst) corrupt system, then who can we rely on to give patients a better handle on their own health?

As far as Mr. Shkreli is concerned, he’s just a example of what can happen when an arrogant, young, former hedge-fund manager gets his hands on a product that people need. He’s willing to be the face of a controversy and actually exemplify to the public how screwy the system is. Like Donald Trump proclaiming to donate heavily to both parties in order to personally benefit, Shkreli is opening our eyes to the nature of business side healthcare. Rather than being angry at why someone would do this, be angry at how someone could do this. Don’t hate the player, hate the game.

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It’s Not What Employers Are Doing, But What They Can Do, That Matters

A few days ago, Buzzfeed reported that Staples, the large office supply chain, had stepped up its enforcement of a cap on hours worked for part-time employees. Despite the company’s unconvincing claim* that the policy is longstanding, it appears that Staples implemented the 25-hour-per-week cap in January of 2014 “to skirt impending rules requiring companies to provide health insurance” to employees who work at least 30 hours a week.

Staples' original memo to store managers, as published by Buzzfeed.

Staples’ original memo to store managers, as published by Buzzfeed.

Staples’ decision will undoubtedly renew arguments that the Affordable Care Act’s (ACA’s) employer mandate – the provision that requires companies with more than 50 full-time workers to insure employees who work at least 30 hours each week – has led to harmful effects on work. These arguments, like parallel narratives about minimum wage laws and paid sick leave ordinances, are largely inaccurate, and advocates of evidence-based, power-balancing policy are absolutely right to debunk them.

However, we cede too much when, as is often the case, we default to a defensive stance. “Yes, the negative incentive is there, but the data show such effects to be small or non-existent” should not be the full scope of our response.

Instead, it’s imperative that we change the nature of these conversations. As Thomas Pynchon astutely observed: “If they can get you asking the wrong questions, they don’t have to worry about answers.”

Opponents of an employer mandate, minimum wage, and paid sick leave want people to focus on what employers will do in response to each policy’s enactment. The more relevant question, however, is about what employers can do.

First, it’s important to remember that businesses can deduct employer-provided benefits from their tax bills, and that the employer contribution to health benefits is widely viewed as coming out of worker salaries. Providing employees with health coverage, decent wages, and paid sick leave costs less money than a lot of people think, though it’s certainly more expensive than offering meager wages and no benefits.

More importantly, providing such benefits is the right thing to do. And it is undeniable that a typical business, when confronted with the prospect of labor cost increases, has numerous options. The business can explore ways to improve its productivity. It can raise its prices. It can reduce the salaries of affluent executives, or maybe make a little bit less in profits.**

In the most recent quarter for which financial information is available, August through October of 2014, Staples made $216 million in after-tax profits. Their CEO, Ronald Sargeant, made over $10 million in total compensation in 2013, while other top executives raked in well over $2 million apiece. Barack Obama didn’t have those numbers when he was asked about Staples’ policy a few days ago, but his suspicion “that [Staples] could well afford to treat their workers favorably and give them some basic financial security” was clearly right on the money. The ACA didn’t make Staples cut its employees’ part-time hours; instead, Staples management consciously chose to prioritize a fifth car or third house for a few wealthy individuals over its part-time workers’ ability to put food on the table. Other large companies, from Starbucks to McDonald’s to Walmart, make similar callous choices on a range of issues all the time.

There are two ways to address this problem. The main mechanism currently at our disposal is to loudly call such decision-making what it is – greedy and unethical – and vote with our dollars for companies that treat their workers fairly. Opponents of labor standards focus on what businesses will do rather than what they can do in part because we let them avoid moral reckoning. We won’t win everyone over, but we must not underestimate the power that moral authority has to shape behavior.

The second mechanism is policy that addresses firms’ decision-making. Some recent legislative proposals, in fact, like Congressman Chris Van Hollen’s CEO-Employee Fairness Act, have the potential to begin to wade into these sorts of waters. If we’re worried that companies will choose to lay people off in response to a minimum wage increase, for example, we could raise taxes on the executives of companies that make this choice.

No matter the policy outcomes, it’s essential that we ask the right questions in these debates. It’s worthwhile and important to document the evidence that policies like the employer mandate, minimum wage, and paid sick leave have minimal consequences on work. But it’s also essential to point out that any consequences these policies do have aren’t inevitable.

*As Buzzfeed’s original coverage explained, Staples claims that their part-time hours policy has been in effect for over ten years, and that the memo Buzzfeed obtained only “reiterated the policy.” Yet the memo contained phrases like, “Beginning with the week ending 1/4/2014,” and “Staples is implementing a policy.” A Staples spokesperson did not respond to follow-up questions about the memo’s language.

**It’s possible, though I’ve never seen a study to prove it, that some businesses actually can’t afford to adequately compensate their workers, that they’re barely squeaking by as is with low executive salaries, non-existent profits, and the highest level of productivity they can possibly attain. To the extent these businesses exist – and I’m skeptical that many of them do – it’s worth asking whether a business’s right to keep its doors open should trump its workers’ right to make enough to provide for their families. I don’t believe it should.

Note: A version of this post appeared in The Huffington Post on February 16.

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Paid Sick Leave and the Three Lenses of Policy Analysis

Some political debates have two equally valid sides.  More often than not, however, the evidence is significantly more one-sided than journalists and pundits suggest.  AB 1522, a bill that the California Senate’s Committee on Appropriations just shunted into its Suspense File for consideration on August 14, is an example of legislation for which there is no ethical, intellectually honest opposition.  Three related lenses of policy analysis demonstrate why AB 1522’s minimum requirement of three paid sick days for all California workers deserves our support.

The ethical lens: The debate about paid sick leave, at its core, is about values.  It is undisputed that high percentages of low-income workers, particularly women and Latinos, currently lack the access to paid sick leave enjoyed by more privileged populations.  Supporters of a guaranteed minimum number of days recognize that low-income workers must often decide between working through illness and leaving bills unpaid.  Nobody should have to make that choice.

Opposition to guaranteed paid sick days, on the other hand, elevates considerations of employer profit and flexibility above the job security and subsistence of sick low-income workers.  No matter its professed motivation, therefore, anti-paid sick day activism is immoral by most people’s standards.

The factual lens: Few opponents of AB 1522 explicitly state a disregard for the plight of the working poor.  Instead, they call the bill a “job killer,” enumerating a long list of reasons that guaranteed paid sick leave will allegedly harm working Americans.  Some of the listed reasons are obvious fabrications; for example, the idea that employers who already offer paid sick leave “will have to completely change their existing policies and accounting procedures” is directly contradicted by the law’s provision that “an employer is not required to provide additional paid sick days…if the employer…makes available an amount of leave that satisfies the accrual requirements.”

Other opposition arguments, though slightly more time-consuming to debunk, are no less untrue.  To contend that AB 1522 “will reduce jobs,” its detractors, like those who oppose paying employees a living wage, embrace an economic theory that’s inconsistent with the facts.  Even studies that rely exclusively on the unverified assertions of employers fail to suggest negative economic consequences of paid sick leave laws.  The first report opponents of AB 1522 attempt to marshal in support of their claims concludes only that it was “too early to make a definitive judgment about” the economic effects of Connecticut’s paid sick leave law in February 2013.  A more comprehensive study of the Connecticut law’s effects in March 2014 notes:

most employers reported a modest effect or no effect of the law on their costs or business operations; and they typically found that the administrative burden was minimal.  [Despite] strong business opposition to the law prior to its passage, a year and a half after its implementation, more than three-quarters of surveyed employers expressed support for the earned paid sick leave law.

The findings from the opponents’ second citation, a 2011 report from the Institute for Women’s Policy Research, similarly contradict their claims.  The study finds that “most San Francisco employers reported that implementing the [city’s Paid Sick Leave Ordinance] was not difficult and that it did not negatively affect their profitability.”  While “a relatively small share of employers and employees” reported negative effects, the study concludes that the law “is functioning as intended.”  Just about every study on the economic effects of paid sick leave legislation, in fact, refutes the myths propagated by opponents of the laws.  Research studies also clearly demonstrate “that gaps in paid sick leave result in severe impacts on public health.”  This clear consensus helps explain why “the rest of the world’s rich economies have taken a legislative approach to ensuring paid sick days.”

The political lens: Despite the clear ethical arguments, research consensus, and overwhelming public support in favor of guaranteed paid sick day laws, several states have passed bills that preempt cities’ attempts to enact such legislation.  In 2008, a more robust sick leave bill (AB 2716) died after ending up in the Suspense File of the California Senate’s Committee on Appropriations, the same place in which AB 1522 currently resides.  A coalition of corporate lobbyists, led by chambers of commerce and the American Legislative Exchange Council (ALEC), is responsible.  This coalition has, in the words of David Sirota, successfully recast their “desire to exploit workers as fight-for-the-little guy altruism” by confusing the public and politicians with a relentless stream of unfounded claims.

A simple analysis of the broader advocacy decisions and agendas of the parties to a debate can help us assess the likely veracity of each party’s claims.  For several years now, the corporate coalition that opposes AB 1522 has been systematically “reshaping the fundamental balance of power between workers and employers.”  They have misled the public about a wide variety of issues and maintain clear power and profit motives for misleading the public about sick leave.  People unfamiliar with the specifics of AB 1522 could compare the backgrounds of its opponents with its supporters (typically academics, labor organizations, and other groups that advocate for low-income people) and recognize that proponents of AB 1522 are significantly more likely to be telling the truth.  This political lens heuristic isn’t failsafe – first impressions can be wrong and even the worst organizations sometimes endorse correct policy decisions – but it always provides valuable perspective.  Funding sources and political allies are especially important indicators of truth when topics involve complex research findings and/or similar ethical arguments from each side of a debate.

On the issue of guaranteed paid sick leave, however, each of the three lenses – ethical, factual, and political – is extremely straightforward; if anything, the three days required by AB 1522 are too few.  California lawmakers should rectify their predecessors mistakes and move the bill forward on August 14.

Note: Versions of this post originally appeared on The Left Hook and The Huffington Post.

Update (8/30/14): An amended version of the bill that “would exempt in-home caregivers from the requirement” has “cleared the legislature.”  The SEIU and other unions pulled their support because of the unnecessary and unethical exemption, and I believe they were correct to do so.

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Lessons About Gay Rights and Business from Arizona Bill’s Veto

On Wednesday, February 26, Republican Governor Jan Brewer vetoed S.B. 1062, a bill that would have helped Arizona businesses deny service to gay customers on religious grounds.  Brewer’s veto and the political controversy surrounding the bill illustrated several important developments in the gay rights movement.

First, US society is finally beginning to condemn religious opposition to gay rights; most of us now recognize that people who oppose gay equality, for any reason, are bigoted.  Though S.B. 1062 lacked explicit references to sexual orientation, most of the bill’s opponents correctly recognized it as an attempt to sanction discrimination against the LGBT population.  And while proponents of such discrimination continue to lie about their anti-gay animus and S.B. 1062’s impact, their influence on public perception is dwindling.  A recent poll conducted jointly by ABC News and The Washington Post found both that only 28% of Americans support the discrimination allowed by S.B. 1062 and that only 34% of Americans still oppose same-sex marriage.  Gay rights have “transformed from being a fringe, politically toxic position just a few years ago to a virtual piety that must be affirmed in decent company. This demonstrates why [defeatism is misguided]: even the most ossified biases and entrenched institutional injustices can be subverted.”

Second, the Republican Party platform is no longer uniformly anti-gay.  Not only did Brewer veto the bill, but John McCain and Mitt Romney also spoke out against S.B. 1062.  Mainstream Republican politicians at this year’s Conservative Political Action Conference (CPAC) “skirted around gay issues during the three-day gathering outside Washington, D.C” and focused on other issues instead.  Republican Party operatives seem to understand that opposition to gay rights is becoming more and more politically disadvantageous.

Third, Brewer’s veto indicates the potential impact of voting with our dollars.  The Hispanic National Bar Association, the Arizona Chamber of Commerce, the Arizona Lodging and Tourism Association, the NFL, and a plethora of large businesses including Apple, American Airlines, and Intel began to voice opposition to S.B. 1062 as pressure mounted from customers, clients, fans, and nonprofits.  Brewer’s anti-gay history suggests she only vetoed the bill because of the intense economic pressure to do so.

These developments are cause for optimism about the future for LGBT rights.  I bet a friend seven years ago that gay marriage will be legal in all fifty states by the end of 2023, and I am currently feeling pretty good about my chances.  However, proponents of gay rights must avoid calling business interests our “greatest ally in [the] LGBT equality pursuit.”

As Jon Stewart noted recently on The Daily Show, S.B. 1062 was “morally repugnant” and should have been vetoed based on ethical criteria alone.  Yet few opponents of the bill made ethics their central argument against it; critics of S.B. 1062 instead focused more on its economic impact.  That business interest has begun to align with the interests of the LGBT community is positive, but as Jeffrey Toobin mentioned in a recent piece for The New Yorker, that alignment only achieves the desired outcome “[w]hen, as with expressing opposition to S.B. 1062, it costs business nothing.”

In other words, it’s easy for businesses and politicians to support gay equality and non-discrimination because doing so furthers their economic and political self-interest.  Gay rights have become an issue that, like big philanthropy, “allows [politicians and business leaders] to preen as…great liberal champion[s] to…left-leaning voters, all while…simultaneously press[ing] an anti-union, economically conservative agenda that moneyed interests support.”  We should certainly celebrate the success of the gay rights movement, but we must simultaneously be careful not to enable what David Sirota calls “a bait and switch whereby social issues are increasingly used to perpetuate the economic status quo.”

So before we extol the virtues of the NFL for its opposition to S.B. 1062, let’s remember that the league and its owners routinely rob taxpayers.  Let’s remember, before we get too excited about Jan Brewer, that she supports racial profiling.  And let’s remember, before we pat the Arizona Chamber of Commerce on the back for defending the rights of the underprivileged, that the organization frequently lies about the impact of minimum wage laws.  Instead, let’s honor the success of the gay rights movement by calling its support what it is – the only ethical choice a business can make.  Let’s simultaneously demand that politicians and business leaders elevate ethics over greed in every other policy arena.

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Starbucks’ Greed Versus San Jose’s Living Wage

Living Wage Cartoon

The San Jose City Council will soon decide whether to condone corporate greed and poverty-level wages for workers or apply city law to Starbucks and a large developer who want to lease property at the San Jose Convention Center.  San Jose would normally require businesses leasing the property to pay employees a living wage, but the City Manager’s Office recommends an exemption for Starbucks and the developer because, among other reasons, the businesses “have indicated to City staff that imposing any wage policy requirements in [their] leases…creates financial and competitive hardships in the operation of their respective businesses.”

The dark irony is that Starbucks, the company claiming “financial hardship,” raked in hundreds of millions of dollars in profits in 2013 in “the best year in [its] 42-year-history” while the absence of wage policies like the one Starbucks is currently trying to circumvent consistently causes families to operate at or near the poverty line.  And though Starbucks is unwilling to sacrifice some of an individual store’s profits for the benefit of working families, the company is perfectly happy to sacrifice an individual store’s profits when doing so helps drive out neighborhood coffee shops.

That the San Jose City Council is even considering such a request speaks to the success of corporate think tanks in confusing the public about wage ordinances.  Even though the vast majority of recent research shows no downside to minimum wage laws and most economists support minimum wage increases, too many people still buy inaccurate and unsubstantiated claims that wage requirements hurt businesses, reduce available jobs, and must necessarily raise prices for consumers.  In addition to bad research, however, standard teaching of mainstream economic theory on price floors is also to blame for the misinformation about minimum wage and living wage laws.

Economist Jim Stanford describes the paradigm taught in most introductory economics classes:

I was taught early on at university that minimum wages screw up an otherwise efficiently-functioning marketplace for labour. You see, there’s a demand curve for labour, and it slopes down. There’s a supply for labour, and it slopes up. The two lines cross in the middle, at the sweet spot where supply equals demand.

Now draw the minimum wage: a horizontal line, positioned above the cross. It’s plain as day. Too much supply, too little demand, too much unemployment. Well meaning but foolish bureaucrats should leave the market alone to perform its autonomous, masterful balancing act.

The story is simple. It’s elegant. And it’s wrong. But you have to progress far beyond Economics 101 to find out why. And in the meantime, that simplistic supply-and-demand diagram gets deeply imprinted on too many impressionable minds.

As Stanford goes on to explain, the model doesn’t apply well to labor markets because supply and demand for labor work a lot differently than supply and demand for goods and services.  For example, employers don’t magically require fewer employees the moment wages increase.  But even if we pretend the model is accurate, the policy conclusions drawn from it would still be unwarranted.  First, the argument that the minimum wage is inefficient is based on a concept called deadweight loss, defined as the overall money that could have been made by both producers and consumers of some good under the free market equilibrium condition (in this case, the condition in which no minimum wage exists).  Deadweight loss is essentially meaningless when it comes to assessing the impact a minimum wage policy has on people’s lives.  Though it’s rarely discussed, even the deeply flawed, standard economic model generally shows a net increase in the overall money made by workers when a minimum wage is introduced.

Second, and more importantly, the standard model assumes that employers are willing to pay only what they can.  In reality, large employers frequently operate with enormous profit margins and award exorbitant compensation to executives.  The suggestion that minimum wage laws would force companies to raise prices or lay off workers is an outright lie – most companies can absorb the costs elsewhere quite easily.  Starbucks, for example, could hold prices and profits constant and hire over 1000 new workers at San Jose’s living wage by reducing the salaries of its top five executives to the measly total of $2 million a year each.

Opponents of minimum wage and living wage laws want us to believe, despite their faulty model and a large body of research suggesting otherwise, that wage requirements harm the people they’re designed to help.  They’re wrong.  Minimum wage and living wage laws are quite simply a choice between the welfare of lower-income people and the greed of a wealthy few.  So let’s challenge our professors when they falsely portray minimum wage as an economic problem.  And let’s hope the San Jose City Council keeps the living wage ordinance intact and strong – developer Don Imwalle and Starbucks can afford to pay their workers enough to make ends meet.

If you’re interested in having an impact on this issue, SumOfUs is circulating a petition asking Starbucks to drop its request; the company has responded to intense public pressure over unethical practices before.  You can also find San Jose City Council contact information here.

Update: This article ran on The Left Hook on Tuesday, January 28.

Update 2: The San Jose City Council voted later on Tuesday, January 28 to grant the exemption to Starbucks and Imwalle.  Though Ash Kalra, Kansen Chu, Xavier Campos, and Don Rocha voted in the interests of the citizens of San Jose, the rest of the council, led by Chuck Reed, Sam Liccardo, Madison Nguyen, and Rose Herrera, ignored the interests of their constituencies.

Update 3 (6/16): Starbucks apparently denied that they ever asked for the exemption on January 22, 2014, an assertion that is directly contradicted by the city memo that was also linked earlier in this piece.

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Financial Incentives and Social Good: Dan Pallotta’s Faulty Assumptions

At the suggestion of WOVIN founder Darius Golkar, I recently watched Dan Pallotta’s TED Talk on the nonprofit sector.  Golkar recommended this video to me when I asked him why WOVIN donates only 50% of its profits to charitable causes.

Golkar founded WOVIN because clothes we donate to Goodwill, The Salvation Army, and other charities rarely have the effect we intend.  Our hand-me-downs often enrich international “clothing recyclers” who exploit the poor in countries like Ghana and Nigeria.  WOVIN addresses this problem by reconstructing donated jeans into bags, key rings, cardholders, and wallets, selling these products, and then giving a portion of the proceeds to organizations that assist impoverished people.  I sincerely admire this work.

When I first read about WOVIN, however, the 50% number bothered me.  And while Pallotta’s TED Talk may explain why Golkar chose to incorporate WOVIN as a for-profit company, Pallotta’s paradigm reflects many inaccurate and problematic assumptions we have about business.  Several of these assumptions pertain to executive compensation.

Pallotta begins to discuss compensation 3 minutes and 11 seconds into his talk.  He says:

So in the for-profit sector the more value you produce, the more money you can make.  But we don’t like nonprofits to use money to incentivize people to produce more in social service.  We have a visceral reaction to the idea that anyone would make very much money helping other people.  Interesting that we don’t have a visceral reaction to the notion that people would make a lot of money not helping other people.  You know, you want to make fifty million dollars selling violent videogames to kids, go for it, we’ll put you on the cover of Wired magazine, but you want to make half a million dollars trying to cure kids of malaria and you’re considered a parasite yourself.  And we think of this as our system of ethics, but what we don’t realize is that this system has a powerful side effect, which is, it gives a really stark, mutually exclusive choice between doing very well for yourself and your family or doing good for the world to the brightest minds coming out of our best universities…[T]ens of thousands of people who could make a huge difference in the nonprofit sector [are] marching every year directly into the for-profit sector because they’re not willing to make that kind of lifelong economic sacrifice.

He then uses the chart below (the Stanford MBA figure is the median salary for someone ten years out of business school and the CEO figures are averages) to argue, “There’s no way you’ll get people with $400,000 talent to make a $316,000 sacrifice every year to become the CEO of a hunger charity.”

Executive Compensation Bar Graph

While I agree with one aspect of Pallotta’s analysis – current economic and social incentives in the United States disproportionately advantage businesses that contribute little to society over more altruistic endeavors – Pallotta erroneously suggests we can fix this problem and better promote social good by making charitable organizations more like typical U.S. businesses.  This paradigm recurs during his analyses of several topics and reflects an overarching view of economics I plan to address in future posts.  For the purposes of this post, however, I will focus on four faulty assumptions he makes while discussing executive compensation:

Faulty Assumption #1: The value individuals produce in the for-profit sector correlates highly with the salaries they earn.

We erroneously believe personal success indicates remarkable personal characteristics – that belief is a well-documented psychological fact.  Yet chaos theory, regression to the mean, and intelligent analysis indicate that luck and privilege influence success considerably more than talent – even narrow definitions of luck in recent economic analyses show that luck plays a much larger role in market outcomes than most people think.  Whether it’s even possible for someone’s “talent” to produce the kind of value Pallotta describes is a hotly debated question.

In US society, our lack of regulation and accountability for moneyed elites helps promote inflated CEO salaries even when the individuals receiving these salaries have very clearly reduced a company’s value.  The bank bailout of 2008 and the huge profits reaped afterwards by executives directly responsible for the financial crisis clearly demonstrate the inaccuracy of Pallotta’s assumption.

Faulty Assumption #2: People make career decisions based primarily on monetary incentives.

Money certainly drives some people’s career decisions, but many people care at least as much, if not more, about some combination of prestige and ethics.  Teach For America (TFA) is an excellent example of an organization that knows this fact – while TFA can offer corps members only beginning teacher salaries in its placement districts, the organization attracts the top graduates from the best colleges in the country.  Why?  Acceptance into TFA impresses nearly everyone, looks fabulous on a resume, and helps corps members feel like part of a larger “movement for educational equity.”  While it’s certainly possible that some corps members join in hopes of the long-term payout TFA’s connections might provide, the vast majority of corps members I know applied because of TFA’s mission and status.

Faulty Assumption #3: High levels of compensation promote increased productivity.

Education research suggests that incentives only improve performance when they focus on behavioral inputs– to improve, students and teachers need to know exactly what behaviors they must produce to receive rewards.  They must also have the ability to execute desired behaviors.  Examples of input-based incentives that have produced desired outcomes include paying students to read books or paying teachers to relocate to more challenging schools.  Students and teachers who are instead offered prizes for behavioral outputs like student grades or test scores, on the other hand, do not improve their performance. Executive salaries and bonuses, like student grades and test scores, are often based on outputs (like company economic performance) and therefore unlikely to increase productivity.  I believe this phenomenon helps explain why researchers agree that merit pay initiatives are misguided.

Even when incentives are offered for clear, achievable tasks, the magnitude of the incentive drastically changes its impact.  Recent research suggests that when incentives are very high, performance actually declines.  Behavioral economist Dan Ariely conducted an innovative study which found that individuals offered substantial amounts of money for winning games succeeded considerably less often than individuals offered low to moderate amounts of money (Ariely believes that the stress we experience when confronted with high stakes causes this effect).

Faulty Assumption #4: High levels of compensation in the nonprofit sector will motivate more people to work for social good.

Wealthier individuals are, on average, less empathetic than the rest of society.  As Chris Hayes (in Twilight of the Elites) and Daniel Goleman have suggested, powerful people tend to surround themselves with other powerful people and often forget about or are ignorant of the circumstances of those less fortunate.  But psychology also plays a role – the mere mention of money predisposes people to behave less altruistically.  Since external incentives also erode internal motivation, a focus on salary in the nonprofit sector could potentially diminish compassion in that sector.

Our current incentives are highly problematic regardless of the flaws in these assumptions – on that point Pallotta and I agree.  But the remedy isn’t to embrace a business model that promotes selfishness and greed while failing to generate clear economic value.  In terms of executive compensation, a better solution would reduce exorbitant salaries across the board, call selfish career decisions what they are, and use psychology and behavioral economics research to increase the prestige associated with more ethical jobs.

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