GREENER STOCKHOLDERS?

I try to buy stock in businesses that are so wonderful that an idiot can run them.

Because sooner or later, one will. ~ Warren Buffett

A recent New York Times article by Tyler Cowen suggests an alternative to breaking up the "too big to fail" banks; namely, increase the fiscal liability for major financial institutions through their shareholders. Prof. Cowen suggests for every dollar a bank shareholder invests, he/she becomes liable for at least $1.50 worth of losses as insolvency approaches or occurs. He proposes by making shareholders directly liable for the costs that bank failures impose on society, banks could become more adept (and motivated) at sorting out the risks associated with their activities and tactics without having to increase regulatory overview or split up behemoth banks. His idea apparently is gaining some support, although the article does not state how this fundamental change in shareholder responsibility could be enacted.

I think Prof. Cowen's clever idea should be expanded way beyond the finance sector. It should be applied as one solution to the classic problem of how to deal with negative environmental externalities.

But first, some background. Until recently, and in tandem with other market-oriented policies generally favored by Republican policy-makers, the regulatory machinery of government has increasingly focused on using “market” mechanisms to resolve environmental issues like air and water pollution. Public deregulation of the airlines and to a lesser extent of the electric utilities was an early example of such regulatory policy shifts away from traditional, centralized “command and control” mechanisms. In the environmental policy arena the emergence of so-called market-based (M-B) mechanisms for incenting companies to reduce production of environmental effluents, such as greenhouse gases (GHG), gained some prominence.

Two principal M-B mechanisms have been considered, Cap-and-Trade (C&T) and a Carbon Tax (CT), where carbon-based materials (e.g., fossil fuels) are taxed according to their carbon (CO2-producing) content. Cap-and-trade became a favored market-based environmental mechanism for public policy. There are several examples: The Regional Greenhouse Gas Initiative (RGGI), involving states from Maryland to Maine (with Pennsylvania and Canadian provincial governments as “observers”), is a C&T scheme initiated by New York in 2003 to reduce CO2 emissions. The European Union’s Emission Trading scheme, started in Jan 2005, involves each of its 25 nation states, is currently the world’s largest M-B emissions trading market. In Feb 2007, California governor Arnold Schwarzenegger, along with other western governors, created The Western Climate Initiative (WCI) that originally committed California, Arizona, New Mexico, Oregon and Washington to create a C&T-based regional system by Aug 2008 to reduce GHG emissions. As of Jan 2012, the WCI parties include California and four Canadian provinces, British Columbia, Manitoba, Ontario, and Quebec. Every other US state has now dropped out of the WCI.

In various ways these two mechanisms add to the market price of these goods, so that price better reflects environmental impacts. Although it merits no substantive discussion, there is a third policy alternative: to do nothing. This is what the Bush administration followed by myopically and unsustainably assuming it could continue to live in that great Egyptian river, denial. Although during its halcyon, early days the Obama administration stated its interest in following a much more active plan for environmental mitigation. To date nothing significant has come of this to the consternation of many. President Obama cannot be accused of swimming in denial, but has displayed apparent ambivalence (at best) about enacting new M-B environmental mechanisms to counter growing environmental hazards.

As mentioned above, with the notable exception of electricity markets, efforts in the US to make a good's price better reflect the actual environmental costs associated with its production and distribution have failed, in part because of fairness issues. Even advocates of C&T and/or a carbon tax have to conjure up complex means for distributing tax or permit revenues to lower-income folks in order for the M-B mechanisms to not end up having distinctly regressive effects.

Instead of new federal M-B action to relieve continuing environmental degradation, perhaps it's time to engage the Republicans' much-loved equity markets to directly remediate environmental impacts. This could be done by adapting Prof. Cowen's idea of increased shareholder liability to reflect the cost of environmental clean-up.

There would be at least two (2) advantages to significantly broadening firms' stockholder responsibilities to include the social costs (and benefits) of environmental performance. (1) It would elevate the market value of firms that perform better than others – or who take advantage of this new basis of stock value by supplying technology/equipment that contributes to the firm becoming "greener." (2) By its very nature, it would internalize the costs of remaining a polluter and the benefits of becoming greener through the price of firms' equity, rather than other M-T based schemes that would almost exclusively affect the price of the firms' final products. Equity-holders, not just product purchasers, would have a direct stake in a firm's improving environmental performance. Stock prices of "dirty" firms (eg, coal producers) would fall (unless they quickly figured out how to become significantly greener), and that of "clean" companies (eg, renewable energy producers) would rise. Incentives to make our environment healthier would be closely aligned with stock prices, not merely EPA regulations.

All this without direct government regulation of the environment. What could be more beneficial for cleaning up our environment than making stockholders environmentally (not just fiscally) greener?

MADDIE AND THE MACHINE

The real problem is not whether machines think but whether men do. ~ B.F. Skinner

It's not even just the economy any more; it's jobs, jobs, jobs. Yesterday's announcement that the economy added 243,000 jobs last month and the unemployment rate declined slightly to 8.3% is what passes as good economic news. All economic news stories now seem to require a statement about the proposed action's presumably-positive effect on jobs, be it a tax reduction for the wealthy or a new oil pipeline. These alleged job numbers can be very suspect – do you really think that under Mitt Romney, Bain Capital, a private equity firm, really added 100,000 jobs as a result of its flip and sell actions? Mr. Romney's manufactured number appears quite "shaky," as factcheck.org discusses.

Nevertheless, the pre-eminent emphasis on jobs is both warranted and not surprising in an economy that still suffers from high unemployment. From an historical perspective, having such a significant number of unemployed people for so long remains unusual. Except for the brief recession in 1981-82, one has to go back to 1932-40 amid the trauma of the Great Depression to find unemployment rates comparable or higher.

What is it about this recession that has made high unemployment linger for so long? I believe there are three (3) Inter-related factors: the globalization of product and labor markets; the ever-increasing use of technology that displaces lower-skilled workers; and the failure of education (both by schools and students) to produce workers with skills now needed by employers. Some people – like the Wobblies[1] in the early 20^th century – disparage the substitution of labor with machines. As I mention below, this process is not new; it's been present since at least the Industrial Revolution in virtually all industries, and has been especially prevalent in the US. Workers have long been displaced by machines/automation, and eventually everyone gained, even the dislocated workers, once they learned new skills. The use of automated machines in many industrial and manufacturing processes is now completely commonplace, and regarded as normal. It is workers and machines, not versus machines.

Globalization.  Over the past decade, the international flow of goods and services has steadily increased. According to the World Trade Organization in 2010 (latest year available) total world merchandise trade was $14.350T, which represents a 14% increase from 2009. The US remains the world’s biggest trader in merchandise, totaling $3.247T in 2010. International trade is important to our economy. Increasing exports have certainly been one of the movers of our domestic economic growth. But foreign trade remains a fairly small proportion of US national output – about 14% of GDP – despite the media's barrage of stories saying how we are being decimated by jobs lost to the Chinese. Yes, we have lost many jobs, but the US remains one of the top three exporters and manufacturers of the world. Our merchandise exports are dominated by higher-value goods and services including machinery and equipment, and aircraft and parts. Nevertheless, globalization of markets, especially labor markets, has left all too many lower-skilled wage-earners without opportunities here in the US.

Technological advance.  Virtually all of the technological change that has occurred in the US has been capital-using and labor-saving. Creating better machines remedied our nation's relative lack of manpower. [Although it's no longer true, up until the mid-20^th century, it was mainly men working.] These machines allowed the relatively scarce workers to become much more productive.

Historic examples abound, including those in the agriculture (ag) sector. Harnessing water- and wind-power to mill grains more efficiently had been used since Roman times. Significant American ag improvements began in the 18^th century and have never stopped. The enormous increases in agricultural labor productivity were produced by the adoption of a series of new technologies including hybrid seed; iron/steel plows; mechanical planters, reapers, thrashers, harvesters and combines; barbed wire; and mechanical tractors. [Interestingly, it wasn't until 1954 that farmers used more tractors than horses on the nation's farms.] By 1987, farm labor productivity had increased 100-fold in 150 years. [In 1830, it took 250-300 labor hours to produce 100 bushels (Bu) of wheat on 5 acres of land; by 1987, it took 3 hours to produce 100 Bu of wheat on 3 acres.] These advances allowed ag workers to leave the farms, move to the cities and become industrial workers at the same time as ag output was increasing – in 1930 one farmer supplied 9.8 persons in the US and abroad with their food, by 1970, a single farmer supplied 75.8 people. In 1900, 40% of the US labor force lived on farms; in 1990, less than 2% lived on farms. Similarly dramatic improvements have been made in manufacturing and industrial labor productivity.

As described, agricultural workers were "displaced" by machines that allowed crop production to increase using less labor. This process of substituting machines for labor continues today In the US and elsewhere, as it has for generations. However, unlike times past when the nation's economic growth absorbed dislocated workers in other jobs, such workers (especially lower-skilled folks) now find it far more difficult to secure well-paying full-time jobs. Thus, real wages have stagnated. In essence, our real GDP is now roughly the same as it was in 2007 (before the "Great Recession"), but the US is producing this output with 6 million fewer jobs than in 2007, confirming the significant, continuing increases in labor productivity.

With globalization and technological change, the geographical opportunities for production of goods have again multiplied. The choice of where to produce both high-value and lower-value goods has significant ramifications for current and future jobs. This article, "How the US lost out on iPhone work," illustrates these job consequences, using the example of where and why the iPhone is designed (the US), manufactured (China), and purchased (world-wide).

Education.  If the issue at hand is our nation's enduring unemployment in the midst of globalization and technological change, and it is, we should critically assess both how our educational system can help alleviate this issue and enact public policies to reduce unemployment. I have mentioned before that implementing public policies now to promote robust and broad economic growth – namely targeted, expansionary fiscal policies together with policies to lessen our structural deficit – are an absolute imperative for reducing unemployment.

But in the midst of significant unemployment, numerous industries have noted they are finding it increasingly difficult to hire qualified workers with the skills they require, especially in science, technology and engineering.

What can we do? Unlike the vapid – "don't bother me with the facts" – Republican pronouncements (especially those of Mitt, Newt, Ron and Rick), there is no simple answer to this key question. I believe a solution must be based on improving our nation's human capital – the skills, talents and knowledge of our people and workers. However, improving our human capital takes time and focus that is in very short supply. Increasing funding into our existing educational system is not sufficient, although it is probably necessary. The focus and effectiveness of education must be altered to emphasize producing high-quality "middle-skilled" workers along with needed "higher-skilled" graduates who achieve college degrees. Middle-skilled workers are those that do not require a bachelor’s degree, but do require some education or training following high school. Ideally, workers could receive such skills with re-focused curricula at community and junior colleges. Tragically, in California (and other fiscally-challenged states) these 2-year colleges have been hard hit by state budget cuts, $502 million in cuts just this year, which represents almost 9% of their budget.

Projections from the Bureau of Labor Statistics indicate that during the next decade, 45% of job openings will be in middle-skill positions. What skills are these? These jobs encompass a broad range of professions from construction supervisors and machinists to dental hygienists and paralegals. However, experts believe that many students in our educational system are not attaining the skills needed for these highly-demanded jobs.

An insightful commentary in The Atlantic, "Making it in America," looks at Standard Motor Products, based in Queens, NY, and Madelyn “Maddie” Parlier, one of Standard's middle-skilled workers. It's well worth reading. Standard manufactures after-market (replacement) precision fuel injectors used in internal combustion engines. The article uses this American firm as an example of how modern manufacturing has dramatically evolved. It is now a computer-controlled, machine intensive process, requiring particular labor skills. From the article, Ms. Parlier states, “What worries people in factories is electronics, robots. If you don’t know jack about computers and electronics, then you don’t have anything in this life anymore. One day, they’re not going to need people; the machines will take over. People like me; we’re not going to be around forever.” For now though she is around, through a lot of hard work, determination and some luck. Her future is by no means guaranteed at Standard, as the firm fiercely competes with other auto parts businesses across the globe.

The article mentions that higher-value manufacturing that US firms seek (and compete against  foreign firms with lower labor costs) needs workers who have skills that are much more specialized than those 40 (or even 15) years ago. Unlike what happened in the much of the 20^th century, very few new US manufacturing jobs will go to workers who are unskilled or low-skilled – those with just a high-school education. Now, manufacturing requires middle- or higher-skilled workers, especially in technical tasks like interacting with machines. The more skilled, intelligent and flexible these workers are, the more likely they will continue to hold industrial/manufacturing jobs in America. But, these talents are far less broadly distributed than typified industrial job entrants in decades gone by. Finding a job in industry with just a high-school degree that can lead to a middle-class existence will be doubtful, due to globalization and technological change.

US students need to recognize that in order to succeed in the globalized work place, they must be disciplined and focused in their efforts and perform well. And, despite President Obama's and others' exhortations, a significant surge in US manufacturing jobs while possible, is not that likely – it's not 1950 anymore when the US's industrial and economic might was without peer (due in large part because our industrial and educational infrastructure hadn't been destroyed by bombs and battles in WWII).

Nevertheless, making public investments are worth the risks simply because the opportunity cost of not investing is so large. Re-forming and re-focusing post-high-school education programs to offer students the opportunity to learn employable middle-level and higher skills is essential. Such motivated, skilled workers will be an indispensable ingredient for our economy's broad and sustainable growth. Can we do this? It's hard to believe it will be straightforward, given the riven nature of not only our politics, but our collective sense of what needs to be done to secure a meaningful future for ourselves and our children.

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[1] The Industrial Workers of the World, or Wobblies, is a labor union founded originally by socialists, anarchists and radical trade unionists in 1905. Of local note, the city of Berkeley's recycling is picked up, sorted, processed and sent out all through two different IWW-organized enterprises. And according to Wikipedia, in 2006 the IWW Bay Area Branch organized the Landmark Shattuck Cinemas in Berkeley. The Union has been negotiating for a contract and hopes to gain one through workplace democracy and organizing directly and taking action when necessary.