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David Brodwin's blog

Dream On

If you work hard and play by the rules you will get ahead, according to the American Dream. But working hard and playing by the rules now feels like running in place to a lot of Americans. The past few years of economic data justify their complaint: Most of the productivity gains in the U.S. economy have been captured by the top 1 percent, and most working Americans have seen their standard of living plateau rather than rise.

Economic stratification has spurred politically explosive resentments. And these resentments have encouraged economists to seek a better understanding of economic mobility – or the lack thereof. Is America still a land of opportunity despite rising inequality? And is education – often hailed as the key to getting ahead – still an important part of the solution?

A recent study by Michael Carr and Emily Wiemers of University of Massachusetts, published at Washington Center for Equitable Growth, offers some insights. Carr and Wiemers have developed a way to track the earnings of individual workers over 15-year spans. Their research tells us how mobility has changed over the past four decades, and how mobility varies with gender and level of education. Their findings suggest the dream still lives – but that it's getting harder to rise up the economic ranks, even for those who have a college education.

Carr and Wiemer's research confirms that the much-hyped Horatio Alger "rags to riches" ascent has been rare and is getting rarer. If in you were in the bottom 10 percent of wage earners in 1993, you had only a 6 percent change of clawing your way into the top third 15 years later. And the reverse is true: If you were in the top ten percent in 1991, your chance of falling to the bottom third is only 5 percent. Very few Americans go all the way from rags to riches – or from riches to rags.

When we consider more moderate gains, our economy looks more welcoming. Take for example a person with earnings in the third decile – the 20th to 30th percentile. This decile is what social scientists used to call lower working class. Fifteen years later, that person had about a 39 percent change of moving to middle class or above. Those are not bad odds, all things considered.

Unfortunately, as inequality has grown, economic mobility has decreased. The difference isn't huge, but it's statistically significant and enough to be painful for those caught in it. Compared to 30 years ago, everyone is a few percentage points more likely to end up no better than where they started, and a little less likely to rise up the ladder. Nowhere has the change been greater than at the top. The risk of falling out of the top 1 percent has decreased significantly, while the top has pulled further and further away from the rest.

More education helps people advance, but the edge is no longer as big as you might think. Consider two workers, both of whom started right it the middle of the income distribution. One has only a high school education while the other has a college degree. The high school educated worker has about a 10 percent chance of making it to the top third of incomes, while the college educated person has a 17 percent chance of advancing the same amount. Education helps, but most college-educated people actually don't move up in deciles, much like their less-educated peers.

Many factors probably contribute to the slow but significant decrease in mobility. These same factors reduce the value of college education, even as the cost of college has increased greatly. Globalization reduces the earning power of even educated workers, for example as computer programming moves offshore. Changes in work structures take earning power away from even the most highly educated: For example individual physicians earn less than they did, while more goes to the large health care providers that employee them. Even knowledge-intensive jobs can be automated, with investment advisers now facing competition from computer programs that allocate capital. Finally, with growing inequality, the rungs on the economic ladder are farther apart, so it takes a bigger increase in earnings to jump from one rung to another.

As inequality mounts, and our society slowly becomes more stratified, political unrest will increase. This unrest has transformed the presidential election campaign. Regardless of who wins, the pressure will grow to find more equitable ways to expand opportunities and to share the wealth that results.

David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report August 22, 2016.

A Toothless Call

CEOs of financial services firms are deeply conflicted when it comes to corporate governance. On one hand, like most CEOs, they resist having anyone look over their shoulders. On the other hand, as sophisticated investors they know that effective and empowered boards usually elicit better financial performance. The tension leads to some strangely conflicted behavior.

The conflict manifested itself two weeks ago when a small group of CEOs leading financial and industrial firms proposed principles for better corporate governance. Legendary investor Warren Buffet (head of Berkshire Hathaway) joined Jamie Dimon (head of JPMorgan Chase), and CEOs of General Motors, General Electric, Verizon and others to release an "open letter" and a report called "Commonsense Principles of Corporate Governance," which offers nine pages of detailed recommendations. If implemented broadly, these recommendations would make boards of directors more effective, more responsive to investors and less subject to capture by insiders. Its recommendations would spur corporations to perform better and make them more sustainable in the face of economic turmoil.

The authors didn't say why they chose this particular moment to speak up, but we can speculate. Perhaps it's because corporations are now held in extremely low regard by the public and that makes greater regulation a possibility. In a recently Gallup poll on American's confidence in major institutions, only Congress is held in lower esteem than big corporations.

Perhaps it's because major investors are giving up on the very idea of public companies. The number of public companies has declined by 50 percent in the past 20 years. Investors have shifted towards private equity, which gives them more control over how management spends their money. The shift to private equity is faster among high-growth companies that create the most jobs: From 1995 through 2013, U.S. private equity backed companies grew jobs by 83.7 percent, while all other U.S. companies grew jobs by 27 percent.

It may seem remarkable that corporate titans would call for stronger governance of corporations, but in fact these proposals are quite inadequate compared to the challenge at hand. A lot of the recommendations cover ground that has been well trod by management consultants and business academics over the years. Some of it is blindingly obvious: "The board should minimize the amount of time it spends on frivolous or non-essential matters". Who knew?

To its credit, the report provides some useful tips to promote board engagement and accountability. It emphasizes that a board needs to be able to collect relevant information without filtering everything through senior management. It recommends that board members have skin-in-the-game so their fees depend on the company's long term financial performance. And it condemns the practice of using non-GAAP financial measures to obscure the true cost of doing business.

However, the big problem with governance is not lack of awareness of good practices; it is lack of will: Some CEOs simply don't want their boards to be this empowered. They take deliberate steps to prevent boards from gathering information and prevent them from meeting without the CEO present to steer the discussion. The report fails to explore how corporations could be incentivized or required to adopt better governance practices. For example, the SEC could have a role. Accounting rules could be tightened. Legally, a safe harbor could be created for companies follow governance best-practices. These questions need to be on the table.

Other countries do more than the U.S. does to promote sound corporate governance. The U.K., for example, does more to separate the role of chair and president. But even this watered down, nonbinding and somewhat self-evident statement of principles was too much for some of the companies that were original involved. Two participants reportedly backed out of signing the final report. The loss of nerve is not surprising: Any company that sells services to big corporations must worry about offending potential customers.

It's a testament to the sorry state of corporate responsibility that even this toothless call to apply common sense garners headlines. The CEOs who led this effort deserve kudos for trying. But if we want to have corporations people respect, corporations that consistently create value for stakeholders, we'll have to do better than this.


David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report August 8, 2016.