Stockholders are Fungible, Employees are Not

This has been on my mind after reading some review's of Piketty's "Capital in the 21st Century" (which I really need to make time to read). Paul Krugman's recent post on it made a major point gel for me when he observes that:

How relevant is this story to what has happened so far? In the United States, as Piketty himself stresses, soaring inequality has to date been largely been driven by labor income – by “supermanagers” (I prefer superexecutives.)

Something that I've been considering as I take management classes is that it seems that a well managed firm should end up developing a strong espirit de corps and a great deal of management loyalty in the company. Companies should end up with long term employees and management that will oppose stockholder efforts to extract revenue from the company instead of using it to serve employees. Psychological characteristics and organizational behavior should be leading companies to have an in group of employees opposed to the out group of stockholders.

Yet, instead, we've seen labor share of income decline and record breaking profits. Despite the performance advantages of developing strong employee morale and loyalty companies seem prone to emphasizing staffing cuts and biased towards hiring more aggressive, less loyal employees to the expense of a strong corporate culture.

A possible explanation is that stockholders recognize that strong employee cultures can be against their interests. This forces them to compensate top management extravagantly in order to encourage them to identify with stockholders instead of the corporation they run and to engage in business practices which weaken the corporation in the long run in favor of higher profits now.

This tension ultimately results from the fact that there is no reason why the corporate entity should have any preference for what sort of capital funds it or who is providing it while there is a strong mutual identification amongst the employees of an organization. In turn, providers of capital have no reason to have a preference over which corporate entity receives their funds, with only some minor restrictions they can quickly and easily trade their stock for that of other corporations. Overcoming this difference in commitment requires capital to pay large bribes if it wants to extract wealth from companies. This also helps explain how common restructurings are despite a poor record of giving expected returns as well as a tendency for boards to hire in outsiders despite insiders with better knowledge of the company.

Examples of this would be a number of managers that have been hired to break strong, successful corporate cultures which led to market dominance and stable performance but relatively weak returns to shareholders. HP and Carly Fiorina being the textbook example from my classes.

[Cross-posted at Angry Bear]

Failing to Distinguish the Public and Private Self

Something that I find consistently frustrating about the American right's worldview is that they seem to always be defending powerful individual's rights to keep their public selves private while ignoring very real intrusions into individual's private selves. These particular thoughts are spurred by reading Rod Dreher and Ramesh Ponnuru's posts on religious freedom in the context of the veto of an Arizona bill touching on these topics by Governor Jan Brewer.

The problem is that the right keeps trying to expand the individual to encompass businesses they own. The problem with this is that a business is not a dirty old pair of sneakers, it is instead a web of contracts with other human beings and organizations. It is essentially public in nature in a way that personal property is not.

This should be obvious but for some reason it is lost on many people. Ponnuru mentions the Religious Freedom Restoration Act (RFRA), which from what I can tell is perfectly intact and doesn't really have anything to do with how businesses interact with their customers. He makes clear, however, that the Arizona bill tries to make the bill apply to businesses as well as individuals, so it's not really clear why he brings up the RFRA at all.

I don't see how this is in any way OK. The right has been trying to push this for far too long with far too little opposition. The interests of the owners of Hobby Lobby or Chik Fil A are not the same as the interests of Hobby Lobby or Chik Fil A. Well functioning markets require that these distinctions remain intact, the owners of these companies should not have any rights to impose their beliefs on their employees, their employees enter into contracts with the organization and identify with the organization's goals, which are not the goals of their owners (even if they pencil it into a values statement, anyone with any experience with a business plan knows that values and missions are linked to what the company actually does, fluffing it up is just distracting and does nothing to change how the business is run).

Whenever an individual forms a business as a separate entity they give up the right to treat their efforts as purely private in exchange for the rights and protections granted to a business entity and take upon themselves a public identity and its accompanying rights and obligations. There is no public interest, or philosophical justification, in further blurring these roles. We have already gone way to far in this direction in the United States and it should be opposed at every turn.

What we should be concerned about is the power that we have granted these powerful organizations to invade the privacy of individual's private selves. While business owners are doing an excellent job obscuring their public selves from private view, for example individual tax returns have not been publicly viewable since 1926 (critical if we are going to really on individuals negotiating wages rather than unions, I feel this is a non-trivial element in modern income inequality), donor's identities to political campaigns are often obscured, and owners can hide their involvement in their company's lobbying efforts, they simultaneously have been incredibly successful in gaining access to information on individual's private lives the first two that come to mind are routine drug testing (this is such an incredibly demeaning practice that I continue to be shocked that it is still legal, where is the outrage?) and credit checks for potential employees (another outrageous practice that there is no good argument for, how can we possibly consider ourselves at liberty when we often have to give up this information to get a job?).

American's Woke Up and Realized They are Getting Screwed. Envy Isn't the Emotion They're Expressing.

Arthur Brooks has a column in today's NY Times that I take a bit of exception to. In it, he makes the claim that envy is on the rise in America and that this is a problem.

My central issue with this is that I believe that over the past 30 years institutional and cultural shifts have resulted in an increasing exploitation of the majority of society by those at the very top of the income scale. There is no other credible explanation for why these trends are so pronounced in the Anglo-Saxon countries, with the US an outlier among this group, and so much weaker in the rest of the developed world. While there is a small shift towards inequality that is occurring across all developed nations, probably largely the result of the vast increase in labor supply caused by the development of the third world, this international component is far smaller than the country specific shifts we have observed in the U.S., Canada, and Great Britain.

However, Brooks mentions none of this, instead trying to frame it as if there is a cultural shift towards envy being caused by politicians "fomenting bitterness" and reduced mobility resulting from regulations, taxes, and a lack of school choice (never mind that this agenda doesn't well describe the policies of countries with greater mobility than us). He summarizes Alexis de Tocqueville, stating that:

Alexis de Tocqueville phrased it a little differently, but his classic 19th-century text contains the same observation. Visiting from France, he marveled at Americans’ ability to keep envy at bay, and to see others’ successes as portents of good times for all.

It's been a long time since I've read de Tocqueville, but from what I remember of it his main explanation for American's attitude is that rich and poor alike share in all aspects of life. They meet and discuss the issues of the day at each other's homes and public entertainments, they recognize the mutual equality of each in politics, they live amongst each other and interact continuously in life's daily commerce, and the benefits and burdens of living in a civilized society are shared according to each individual's means and talents.

This is not descriptive of modern America. Our rich do not brush up against their inferiors in every day life. Today, they have separate stores, separate clubs, and a diverse array of high brow entertainments unavailable to the working poor. Their children attend separate schools, they live in separate, wealthy suburbs, and network amongst each other, not their less affluent fellow citizens. Furthermore, they pour money into influencing their favored political candidates, violating the original Americans' compact amongst each other to have equal voice in the political sphere even when of unequal means.

It isn't envy to realize that this is not de Tocqueville's America. If the rich want to maintain their wealth while dispelling envy the onus is on them to return to these roots. Live in Detroit instead of Grosse Pointe, send their kids to public schools instead of private schools, and shop at Walmart. Talk to the grocery store clerk about the most recent episode of Teen Mom and commiserate about the pot holes and bad public transit that each takes along the same commuting route. In short, live life amongst those of lesser means.