Archive for the ‘Economics & Business’ Category

Neat box, but do you respect human rights?
(the Apple Store, Fifth Avenue. Via Apple)

A discussion of Steve Job’s tenure as Apple CEO and workers’ conditions at Apple supplier Foxconn prompted an Andrew Sullivan reader to highlight a 1997 Paul Krugman piece in Slate, In Praise of Cheap Labor. The Sullivan commenter accurately summarizes, “what OECD residents perceive as gross maltreatment of workers ($4/day wages, long hours, poor work conditions) is actually raising living standards in these places, compared to subsistence farming.” Indeed, Krugman argues that given the alternatives of rural poverty or life as a cheap laborer, life as a laborer is better.

Krugman explains, cheap labor is only the first rung on the ladder of an export-led growth strategy, opening opportunities for broader economic advancement throughout society. Look at South Korea and Taiwan, Krugman urges us, they have met success traveling down this path. Of course Krugman is not the only one making this argument about awful working conditions being a steppingstone to future prosperity. Using similar arguments his fellow New York Times columnist Nicholas Kristof has repeatedly praised sweatshops and co-authored a book that opens with similar arguments (Thunder from the East: portrait of a rising Asia). Krugman closes by saying it is our moral duty to think things through. Let’s.

One paragraph stood out in the Krugman piece, particularly given the closing reference to our moral duty:

Workers in those shirt and sneaker factories are, inevitably, paid very little and expected to endure terrible working conditions. I say “inevitably” because their employers are not in business for their (or their workers’) health; they pay as little as possible, and that minimum is determined by the other opportunities available to workers.

(Triangle Shirtwaist Factory fire, 1911. Via Wikipedia)

That “inevitably” deserves a great deal more scrutiny.

Leaving aside the false choice of sweatshops equal development while no sweatshops equal no development, the rather forgiving attitude expressed towards employers who abuse their workers should disturb us all. Profit at the expense of workers’ health is profit at quite a high cost. Isn’t profiteering at the expense of the well-being of others price gouging?

The fact that the alternatives for workers present such dire hazards should make us even more sensitive to their vulnerability to exploitation by factory owners. The consequent use of factory owners’ superior bargaining position at the expense of their workers’ welfare is certainly not a cause for celebration. Structures that (re)produce this relationship do not deserve our praise.

Instead of celebrating the sweatshops, we should be focusing on the “Guiding Principles on Business and Human Rights” (pdf). I’m aware that the Guiding Principles expressed as such did not exist in 1997, but Krugman’s interlocutors were expressing the underlying values of one of the principles, the corporate responsibility to respect human rights.

Briefly, the Guiding Principles were developed under the leadership of John Ruggie as a UN Special Representative on the issue; they are the result of six years (2005-2011) of research and consultations. They propose a three part framework: Protect, Respect, and Remedy.

the State duty to protect against human rights abuses by third parties, including business enterprises, through appropriate policies, regulation, and adjudication.

the corporate responsibility to respect human rights, which means that business enterprises should act with due diligence to avoid infringing on the rights of others and to address adverse impacts with which they are involved.

the need for greater access by victims to effective remedy, both judicial and non-judicial.

[pdf link above]

UN Human Rights Council
(UN Photo)

There is a sentence from the Guiding Principles whose meaning should resonate with anyone analyzing sweatshops, “the corporate responsibility to respect because it is the basic expectation society has of business in relation to human rights;”. Krugman and company have set their basic expectations of corporate conduct far too low.

It is our moral duty to expect more.

(The UN Human Rights Council endorsed the Guiding Principles in June this year.)


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Steve Bell on the BSkyB debate in the House of Commons, the Guardian

The ill chosen words of then-BP CEO Tony Hayward, “I would like my life back”, spring to mind when reading about Rupert Murdoch’s interview with the (Murdoch-owned) Wall Street Journal.

Mr. Murdoch said the company had handled the crisis “extremely well in every way possible,” making just “minor mistakes.”…

In the interview, Mr. Murdoch said damage from the crisis was “nothing that will not be recovered. We have a reputation of great good works in this country.” He conceded, however, that he was “getting annoyed. …I’ll get over it. I’m tired.”(WSJ)

News International has handled the scandal extremely well? The FBI has begun a probe at the request of several members of Congress. In the UK, Murdoch united the House of Commons in opposition to his proposed 100% acquisition of BSkyB. Parties across the House, including the ruling Conservatives, supported Labour’s Opposition Day motion against the BSkyB takeover. What’s more, several MPs urged the UK’s broadcasting regulator to investigate whether News Corporation should own the 39% stake in BSkyB it already possesses; critical parliamentarians argue News Corp does not pass the “fit and proper person” test making it ineligible for a broadcasting license.

Given the seriousness of the allegations, as well as the at least six year timeframe, News Corp is handling the affair about as well as Nixon handled Watergate. News Corp Chair and CEO Murdoch says the buck stops somewhere else,

He asserted, however, that a London law firm the company initially hired to investigate, Hartbottle & Lewis LLP, had made a “major mistake” in underestimating the scope of the problem.

An altogether unsatisfactory response to criticisms. Next week, MPs on the Culture, Media and Sport Committee will not be as forgiving as Fox Business interviewers (via Left Foot Forward).

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Conservatives and libertarians who normally sneer at the wisdom of government management suddenly become very trusting when it comes to aggressively busting up public sector unions. Those touting the unconstitutionality of state mandated insurance for tens of millions suddenly ignore freedom of association and the right to petition the government when the rights bearer is a public sector worker. Also, don’t mind the Universal Declaration of Human Rights, “Everyone has the right to form and to join trade unions for the protection of his interests.” Article 23(4), and the International Covenant on Civil and Political Rights (Article 22).

Glorious reception rooms, clock tower included!

Tax cuts for the rich, a-okay, massive inequality, not a problem – but stop those pesky public sector workers borne on satin sedan chairs. Because they were the cause of the Great Recession. Obviously their greed, their fecklessness, their complex financial instruments of dubious provenance led to our fiscal position. If you believe that then I have a great neo-gothic palace to sell you on the banks of the Thames.

Like private sector unions, public sector unions advocate for the terms and conditions of their members. Some have identified this advocacy as nefarious, unions as little cartels scheming against the taxpaying public at large. Though public sector unions don’t seem to be doing such a good job in conspiring to capture the government, Don’t join the government to get rich, I’ll concede this rent-seeking point for the sake of argument.

This demerit must be weighed against unions’ promotion of the public interest. It is in the public interest to have qualified teachers. It is in the public interest to oppose ambassadorships as presidential patronage to the detriment of the professional diplomatic corps. I’d argue further it is in the public interest to have same-sex partner benefits for employees. I don’t trust the magnanimity of government as employer. Politicians have all sorts of hobbyhorses that can interfere with government employees rights (not only the right to unionize). Unions can object to blanket drug testing, restricting health insurance coverage of abortions, and invidious discrimination. I hope conservatives and libertarians would grant public sector workers some privacy rights, or does working for the government mean you jettison those too? Does public sector employment mean you open yourself to objectification and exploitation by every politician seeking to grandstand? When government acts as employer it is subject to the same blindspots and biases as private sector employers and some pathologies all its own.

Employers have imperfect information. Regular negotiations with workers acting collectively is one mechanism whereby an employer can gain a more complete understanding of their workplace. Unions offer a safe space for employees to voice their concerns without fear of reprisals; employees gain the opportunity to constructively contribute to workplace management. Want to tackle government waste, fraud, and abuse? Then unions are an important partner, not an adversary to be alienated.

Overall, I favor consociational democracy’s neo-corporatist approach. We should endeavor to take the adversarial sting out of government-union-industry relations, including where government is acting as employer. Imagining this consensual process in America may be pie in the sky as Will Wilkinson claims, but dismantling workers’ rights, à la Wisconsin, is easily a step in the wrong direction deserving fierce opposition.

In undergrad, there was an unsuccessful Teaching Assistant’s unionization effort; unsuccessful because the Republican dominated National Labor Relations Board decided TAs were more like students than employees. I came to two conclusions from watching the battle and the resulting TA strike. First, given power unchecked, even nice people like professors can abuse it – stories of TAs picking up a professor’s dry cleaning for instance. Second, if the university was so thoughtful and caring, the TAs wouldn’t have grievances to mobilize around for unionization in the first place. Looking for a catalyst for unionization efforts an employer need only look in the mirror. The same two points inform my perspective on public sector unions.

A British trade unionist remarked that without unions kids would still be up chimneys. This shorthand for the complex history of unionization sums up my stance towards unions, public and private sector alike. A whole host of benefits we take for granted result from unions’ long labors. One bumper sticker says, “Unions, the folks that brought you the weekend”. Safer, more humane, family friendly workplaces, those are the devious ends of unions. Until I see the evidence of the voluminous riches being captured by public sector workers’ unions, I’ll remain suspicious of those calling for them to be gutted at per Wisconsin Republican’s proposals.

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How much for the Hirst? (For the Love of God, Damien Hirst, 2007)

Julian Sanchez has a post on the potential for the use of “balancing” language to obscure through homogenizing and simplifying a more textured vision of underlying rights. Balancing-speak loses nuances of privacy, he cites Dan Solove on privacy as “not a monolithic value defined by any singular essence, but a cluster concept defined instead by overlapping family resemblances.” I wonder if the same has not occurred in the use of the word equilibrium in economics, with consequences for assessing when a market failure has occurred. Outcomes of markets go under-scrutinized for normative values and under-contextualized for wider social consequences.

The discussion of art not presenting a case of market failure does not unpack these underlying assumption. In 2009 the Tate Modern had about 5 million visits, free general admission about 30,000 square meters. MoMA had about 3 million visits, admission $20 about 60,000 square meters. The values one brings to these facts, your interpretive lens, will determine whether you think: several tens of millions of UK taxpayers are being fleeced by the hoity-toity set or MoMA is missing 2 million visits (or more) thereby insufficiently serving the public. Which interpretation is more convincing? As the culture wars demonstrate, talking across a chasm in values presents difficulties; Richard Rorty’s final vocabularies comes to mind.

If markets are criticized as knowing the cost of everything and the value of nothing, this alternate value-informed discussion might be the inverse, knowing values but not costs. We can not make distinctions amongst alternatives if everything is priceless, and yet pricing everything homogenizes and simplifies with potentially harmful social consequences. For instance, what is the price of child labor?

So a classical economics inflected point and a critical theory inflected point, my kingdom for a synthesis. When in doubt (ab)use John Rawls. Those behind the veil of ignorance say free museums. Problem solved.

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The Night Watch, Rembrandt (1642)

Leona Helmsley’s notorious remark fits the world of corporate tax avoidance well. Sociological Images highlights a BusinessWeek article outlining a particular scheme multinationals employ to avoid billions in US and foreign taxes.

I’m pretty much in agreement with Oliver Wendell Holmes, “Taxes are the price we pay for a civilized society.” Whether you believe in a minimal night watchman state or a generous welfare state, taxes are indispensable to providing public goods. Or perhaps more precisely, compulsory taxation resolves the free riding problem. BusinessWeek identifies Google, Microsoft, Facebook, and Forest Laboratories as companies that use this particular tax avoidance structure called the Double Irish or the Dutch Sandwich.

In Google’s case, it generally works like this: When a company in Europe, the Middle East, or Africa purchases a search ad through Google, it sends the money to Google Ireland. The Irish government taxes corporate profits at 12.5 percent, but Google mostly escapes that tax because its earnings don’t stay in the Dublin office, which reported a pretax profit of less than 1 percent of revenues in 2008.

Irish law makes it difficult for Google to send the money directly to Bermuda without incurring a large tax hit, so the payment makes a brief detour through the Netherlands, since Ireland doesn’t tax certain payments to companies in other European Union states. Once the money is in the Netherlands, Google can take advantage of generous Dutch tax laws. Its subsidiary there, Google Netherlands Holdings, is just a shell (it has no employees) and passes on about 99.8 percent of what it collects to Bermuda. (The subsidiary managed in Bermuda is technically an Irish company, hence the “Double Irish” nickname.)

Businessweek charts how the scheme works.

via BusinessWeek

Every relevant authority should mobilize to dismantle this devious dodge of corporate responsibilities. Corporations reap tremendous benefits from the societies in which they operate. From physical infrastructure, like roads and rails, to social infrastructure, like law enforcement and an educated workforce, corporations rely on the services provided by the state. One economics professor estimates the losses to the US are $60 billion annually (BW). To put that figure into context, the president’s 2011 budget request for

  • the State Department – $57 billion
  • the Department of Education – $50 billion
  • the Department of Energy – $30 billion
  • NASA – $18 billion(WallStats)

The Businessweek article concludes,

The government has made halting steps to change the rules that let multinationals shift income overseas. In 2009 the Treasury Dept. proposed levying taxes on certain payments between U.S. companies’ foreign subsidiaries, potentially including Google’s transfers from Ireland to Bermuda. The idea was dropped after Congress and Treasury officials were lobbied by companies including General Electric (GE), Hewlett-Packard (HPQ), and Starbucks (SBUX), according to federal disclosures compiled by the nonprofit Center for Responsive Politics. In February the Obama Administration proposed measures to curb companies’ ability to shift profits offshore, but they’ve largely stalled.

“The system is broken, and I think it needs to be scrapped,” says Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan Law School. “Companies are getting away with murder.”

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Initially when I set out to respond to two posts skeptical of “sin taxes” at the League of Ordinary Gentlemen I planned to make a public health case involving herd immunity, drawing as a comparison the social consequences of the liberty of not being vaccinated – failing to tackle excessive drinking amounts to failure to reach the necessary levels of vaccination to secure herd immunity with similar harmful social effects. Luckily, I don’t have to make that case, a study in the Lancet (gated, pdf) addresses several of the questions concerned far more directly: “Estimated effect of alcohol pricing policies on health and health economic outcomes in England: an epidemiological model” (by Robin C. Purshouse, Petra S. Meier, Alan Brennan, Karl B. Taylor, and Rachid Rafa, published March 24, 2010).

Before diving into the Lancet study, I need to explain the scare quotes around “sin tax”. Proposed taxes on alcohol have a public health purpose. Taxing alcohol, or cigarettes, or high fructose corn syrup, isn’t about moralizing. It is about liver damage, lung cancer, and obesity. That is to say, epidemiologists are not claiming to be holier than thou. Were a safe version of alcohol to be invented tomorrow, an alcohol without the adverse effects (impaired motor skills, heart disease, etc.), I would wholly accept that this alcohol mark two would not be subject to these harm taxes any more than bicycles and rocking chairs would be. In sum, the taxes are linked to the public health consequences of these products, not some sort of inherent evil in the product itself. Thus this class of taxes should not be categorized as analogous to prohibitionist efforts to stop Demon Rum. (The comments over at LOG had much discussion of capturing externalities of alcohol use and abuse, but rarely was the case discussed in explicit public health terms.)

On to the study in the Lancet: What are the public health consequences of a variety of government interventions in the sale of alcohol in England? The interventions the researchers modeled are “across-the-board price increases, policies setting a minimum price per unit (eg, a unit of alcohol, 10 mL ethanol, cannot be sold for less than £0.40), and policies restricting price-based promotions in the off-trade sector (eg, banning buy-one-get-one-free offers).”

The researchers found that the minimum price per unit of alcohol is the most proportional method for achieving the public health goals (less disease and death due to excessive drinking) while not being excessively punitive towards the moderate drinker. Since responsible drinkers consume less cheap alcohol, the minimum price approach is easier on their wallets. Minimum prices are distinct from a general tax in that they focus on the cheap, high strength alcohol products; those products with prices above the minimum price face no extra levy. Setting a minimum price of £0.50 per unit of alcohol raises the moderate drinker’s annual alcohol costs by £11.80. The same minimum price raises the hazardous drinker’s annual expenditure by £68.20 and the harmful drinker’s annual expenditure by £163.40. (Moderate, hazardous, and harmful are defined by the number of units of alcohol ingested per week. p. 7) The average English drinker’s annual expenditure would be raised by £37.80.

What does an extra £3.07 a month for the average English drinker buy in terms of health outcomes (ten years after implementation)?

  • 2,930 fewer deaths per year
  • 8,100 fewer acute illnesses
  • 20,700 quality-adjusted life years gained
  • 40,900 fewer chronic illnesses
  • 92,200 fewer admissions to hospital
  • £274 million annual savings to the health service

I’ll close with an attempt to address Mark Thompson’s quality of life point. Thompson writes,

Now, if by “quality of life,” we all mean a particular thing – say a particular lifestyle, or the maximization of life span – this is not a real problem. Unfortunately, one’s idea of “quality of life” can vary tremendously from person to person and locale to locale. For instance, one can rationally – and correctly – conclude that the happiness brought about by the occasional overindulgence in alcohol or the daily glass of soda one drinks makes life worth living in a way that a marginal increase in life expectancy does not.

I draw on two sources for my reply. One source is the idea of intergenerational justice (or intergenerational equity). The other source is behavioral economics, particularly a recent discussion between Glenn Loury and Sendhil Mullainathan (the first 10 minutes especially, “Behavioral economics, as illustrated by the snooze button”). Loury defines behavioral economics as “a departure from the tradition in economics inquiry of assuming that people act in a fully rational way on behalf of their well defined interest. And taking seriously what has been learned about the way that human beings actually make their choices and govern their behavior. What has been learned in the allied sciences of psychology, human cognition, and so on.”

What stood out to me is the breaking apart of interests. Disaggregating interest from a single, “I seek X” to a view where interests are conflicting within a single individual; the idea of “quality of life” can vary within the same person. One interest can defeat another for a period only later to be reversed. Mullainathan highlights the snooze button on alarm clocks, the MIT Media Lab alarm clock, Clocky, that rolls off the table and hides so you have to get up to turn it off and the Japanese alarm clock cum helicopter that floats off for a similar reason. As Mullainathan puts it, instead of setting the alarm clock for when we actually want to get up, why a snooze button that results in ten minute chunks of fitful sleep? In sum, the snooze button illustrates the conflicts between self-control and (pre)commitment and various mechanisms that might be employed to bring ourselves back under control.

Now as a thought experiment* loosely based on intergenerational justice, suppose we took a single individual and broke them up into various ages. Around the table is you at twenty years old, thirty years old, forty years old and so on. The various generations of you have convened a conference to discuss your health behavior across your lifetime. On whom do they focus? What are they advising? And why do they advise it? I would suggest their focus is going to be on the age twenty and thirty versions of you, they’re advising all sorts of healthy courses of action, eat right, exercise, don’t drink to excess, don’t smoke – public service ads galore. They suggest this advice because your quality of life will likely be substantially better for many years under their guidance. These older versions of you are interested in your not pressing the snooze button for the extra ten minutes of fitful sleep only to arrive at work ten minutes late; in the health sphere the short term gains are even more fleeting and the long term penalties are even more harmful. (This line of reasoning is the way that I make sense of discussions of quality-adjusted life years and disease burdens as related to an individual case.)

In fact, you’d probably be outvoted by the decades older versions of you insisting on healthier choices for their/your future benefit. All this is to say that when the government taxes alcohol, tobacco, etc., the government is really gently nudging you towards your own wise counsel.

* Crooked Timber’s Harry Brighouse on the role of thought experiments in moral philosophy here.

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The Economist has a trio of glass half full articles about women’s workforce participation (I, II, and III). During the course of their discussion, the Economist invokes “old-fashioned meritocracy” and pooh-poohs the idea of affirmative action, writing, “To begin with, promoting people on the basis of their sex is illiberal and unfair, and stigmatises its beneficiaries.”

I disagree with the Economist’s assessment of affirmative action. For instance, I support the UK government’s Equality Bill (though diluted) and the French government’s proposals to

see women make up half the figures in France’s leading boardrooms by 2015, under a bold plan to impose gender equality on the male-dominated business world.

In a bill submitted to the French parliament this week, all companies listed on the Paris stock exchange would have to ensure female employees made up 50% of their board members by 2015. If passed, a gradual implementation of the law would see businesses obliged to have women in 20% of board seats within 18 months, and 40% within four years. (Guardian)

It is remarkable that the Economist goes for a glass half full perspective when in various areas the glass is nowhere near such lofty heights, the Economist writes, “Only 2% of the bosses of America’s largest companies and 5% of their peers in Britain are women.” Additionally, “…only 10.5% of board members in CAC 40 (French stock market index) companies are female.” (Guardian).

…in the UK, 12% of FTSE 100 directors are female and one in four boards are exclusively male. Sweden and Finland boast more women at leading companies at 22% and 17% respectively.

The proportion of female directors among US Fortune 500 firms is 15.2%. (Guardian).

The celebratory title, “We did it!” hardly seems to fit the circumstances.

As for the “old-fashioned meritocracy” the Economist praises, grim simulacrum of meritocracy is a more apt description. The mechanisms that reinforce and reproduce privilege impede, “Fairness at entry, fairness in discretionary pay, and fairness in progression.” (Trevor Phillips via DJFN). From all male social clubs to conducting business at the boom-boom room, a variety of structural mechanism can slow change to a glacial pace.

Mad Men doesn’t seem so distant, consider,

In addition to triple-X-rated sexual harassment, Antilla’s subjects also suffered cold, hard job discrimination. Many of their firms paid them lower base salaries than their male equivalents, blatantly yanked away clients and commissions, welcomed them back from maternity leave with pay cuts and demotions and refused to supply them with the study materials that helped male brokers earn their licenses. As of 1994, male sales assistants at Smith Barney were more than eight times as likely to make broker as their female counterparts.

The book’s title, with its connotations of stock market heights, sounds allegorical. But the Boom-Boom Room was a real place: the basement rec room of a Shearson brokerage office in Garden City, N.Y., where some of these abuses took place. Antilla reports on a number of companies, but the Boom-Boom Room is her Tailhook. She spends the first half of the book enumerating the humiliations women suffered at the Garden City branch, and the second half describing the ill-fated lawsuit in which they tried to gain redress.

Quotas aside, a wide array of proposals fall under the umbrella of affirmative action (aka positive discrimination in the UK, and temporary special measures in UN human rights treaties). While I favor the most forceful measures, quotas and timelines à la France and Norway, alternate policies include:

  • soft targets with comply or explain as the only sanction,
  • recruitment efforts and mentorship programs to encourage participation of the underrepresented,
  • longlists or shortlists that prescribe diversity,
  • guarantees that some portion of the underrepresented reach a certain phase in the application process (second look, first interview, etc.).

The policy landscape includes far more choice than deadline driven affirmative action measures or inaction.

Overall, the Economist does not reach a holistic vision (entry, pay, and progress) of women’s workforce participation, though to the Economist’s credit, they recognize the slow pace of change and some social structures’ contribution to inequality. Perhaps the Economist’s triumphalist “We did it!” is right in the sense that the Wright brothers also “did it” when they flew a few meters off the ground for a few seconds. But that sets our sights awfully low when our aim should be far, far higher than that. For instance, a quarter of FTSE 100 boards being all male is simply not good enough. The history and ongoing discrimination in terms of pay and positions makes for less than inspiring reading.

I’ll close by saying, representation of women on the boards of the largest companies in a handful of wealthy Western nations is just one, fairly narrow axis for looking at women’s workforce participation. I purposefully argued in this field of the Economist’s domain, avoiding some of the broader and more obvious sources for analysis of women’s human rights, Human Rights Watch and the US State Department’s annual country reports. Taking into account this larger optic, it becomes even clearer that the cause for celebration of progress is limited indeed.

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