A New Social Contract? Part 1: Defining the Issues

Back in March of 2020, I applied the techniques from “Seeing Around Corners” to what kind of economic and social future we might anticipate post-pandemic. One of the scenarios I outlined was a return to the kind of large role for government that defined the New Deal. My “Time Zero” headline was “In an Echo of FDR’s “rendezvous with destiny” speech, officials turn to government programs and taxation to combat economic “tyranny.”

Well here we are just around the beginning of a new administration, and that scenario is looking more and more likely. I was asked by Ravi Mattu of the Financial Times to outline indicators for whether we might get more human workplaces. While he did cite me in his piece, our behind-the-scenes exchange was much richer. I’ll share with you, dear readers, in this thought spark and the next. This one will focus on weaker signals getting stronger. The next one will look at some policy proposals and the debates likely to accompany them.

Signals becoming stronger

In Seeing Around Corners, I point out that major inflection points usually evolve, as the old Hemingway line goes, “gradually, then suddenly.” What I look for in this evolution is evidence that weak signals are becoming stronger. With respect to the idea of a more human workplace, we are certainly seeing a torrent of evidence that this is rising to the surface of people’s thinking, a precursor to acceptance of meaningful policies that might make a difference to a majority of people.

This is now being reflected in mainstream newspaper stories. One that caught my eye was Nicholas Kristof’s op-ed in the New York Times. He begins with this recollection from history:

Soon after Franklin Roosevelt was inaugurated in 1933, a visitor assessed the stakes of his New Deal proposal.

“Mr. President, if your program succeeds, you’ll be the greatest president in American history,” the visitor told him. “If it fails, you will be the worst one.”

“If it fails,” Roosevelt responded, “I’ll be the last one.”

Roosevelt was keenly aware of the criticality of bringing the country out of the despair of the moment into the hope of a more unified, brighter future. In many eerily parallel ways, we’re facing similar crises.

Take a symbol that came to represent incumbent Herbert Hoover’s callous presidency in the minds of many – so-called Hooverville’s, shanty towns built to house the homeless. Today, we have similar homeless encampments. A recent study noted that they are in every city and state, which is attributed to stagnant wages, unemployment and steadily increasing housing costs.

Homeless shantytown known as Hooverville, foot of S. Atlantic St, ca. 1937

Los Angeles, CA, USA - September 12, 2020: Tents and shelters on street in the city in California, a sad alternative for socially disadvantaged and homeless people

Conservative observers also see the signs that things are likely to change. A Wall Street Journal op-ed’s title makes that clear. “Will COVID-19 Shake Up Capitalism?” it asks. The subtitle is even more telling: “The pandemic sped up demands for changes in the economic system. Shareholders might want to brace for change.” The article goes on to observe that, “the past decade has prepared the ground for a shift to more interventionist government. The stunning shareholder returns of the past decade hang in the balance.”

As James Mackintosh, the Journal reporter who wrote the article observes, despite all the posturing by the Business Roundtable and multiple groups set up to see how capitalism can be more inclusive, “the changes have been mostly cosmetic.” Although Biden did not win a mandate equivalent to FDR’s landslide, the evidence that things are likely to change is becoming stronger. Let’s look at a few signals.

Increasing concern about inequality

We can’t have successful capitalism or a strong democracy without a secure, prosperous middle class. There doesn’t seem to be much disagreement about that. The issue gets more contentious when the question becomes who deserves what share of the earnings in our capitalist system.

In the United States 58.3 million workers earn less than $15 per hour. 41.7 million earn less than $12 per hour. Had the distribution of wealth in the United States between 1945 through 1974 held steady, the aggregate income of the bottom 90% of Americans would have been $2.5 trillion higher in 2018 alone, according to a study published by the Rand Corporation. As unapologetic capitalist and campaigner for higher wages, Nick Hanauer reports, that’s enough to give every household in the country an additional $1,144 per month. Every month. Cumulatively, Hanauer concludes, by 2020, the amount of wealth that trickled up would total over $52 trillion.

Economic inequality is harmful to society’s long-term best interests. There are many, many studies that bolster this conclusion. There are too many to list here, but I’ll offer a sampling. A great summary (from 2012, no less) is offered by my colleague, Joseph Stiglitz. One that got the conversation going in earnest was Thomas Piketty’s Capital in the 21st Century, a book that delved into arcane tax data to reveal mind-boggling discrepancies in the rewards allocated in our current system. Richard Wilkinson has observed this for a long time (see his TED talk here). Many writers have done a great job documenting the plight of poor workers and the negative consequences of excessive financialization of our economy. One of my favorites is Brian Alexander’s Glass House: The 1% Economy and the Shattering of the All-American Town. Barbara Ehrenreich’s work (such as her book Nickel and Dimed) is also illustrative. A despairing article is by Nick Carnes “The class war in America is over: The Rich Won.”

An increased focus on the awful jobs problem

In addition to being poorly paid, as Hanauer points out, the low-wage jobs that are growing rapidly in the United States are horrible in other ways. Insufficient and rapidly changing hours make it difficult for people to plan their lives, manage childcare or access education. Few have the ability to save for an emergency or retirement. The chronic stress of just getting by actually diminishes mental performance.

MIT professor Zeynep Ton has eloquently made the case that bad jobs – even in low-margin businesses – are not inevitable. When combined with excellent operations, people with good jobs can help drive revenue, decrease turnover, provide better customer service and otherwise do good things for companies. Zeynep has founded the Good Jobs Institute, an organization dedicated to making the jobs of the future good jobs. There is a wealth of information, tools and other goodies on the Institute’s website. Among the more interesting observations she makes is that in many cases, bad jobs are part of a vicious, self-fulfilling cycle. Companies fail to invest in people, poorly paid and trained people provide poor levels of service, customer loyalty is affected, which in turn hurts revenues, which leads to even more pressure on people.

Zeynep Ton offers a useful perspective on how, even without policy changes, we could hold CEO’s to account for the quality of the jobs they create. She’s developed a “good jobs” scorecard that provides useful metrics ordinary people and policymakers can use to compare companies. See this link: https://hbr.org/2017/12/getting-started-on-good-jobs

You can replay my fireside chat with Zeynep here.

Increasing anger at companies that socialize costs while privatizing gains

It has unfortunately become quite common for business organizations to enhance profits by pushing costs onto society or the public at large. This takes many forms.

One of the most egregious took place in the Great Recession, in which banks deemed too big to fail were saved from poor decisions by actions diverting money from the public coffers to rescue them. As a critical article recounts “no one was really held responsible for any of his or her bad decisions. Ever.”

Another form of this takes the shape of the public essentially subsidizing company operations. A flashpoint example of this is when full-time employees of large companies earn so little that they qualify for Medicaid or food aid. MacDonald’s, Wal-Mart and Amazon, all companies that booked billions in profits, were among the top firms whose employees took advantage of these benefits. Essentially, a portion of their workforces are making ends meet by turning to publicly funded benefits.

Public coffers also cover a range of costs that would eat into company profits were employers to bear them. Health care is a frequently cited example – in 2019, less than half of all private sector companies offered health insurance to their employees, according to an analysis by Kaiser Family Foundation. So, too, are business models in which workers accrue no benefits at all, because they are classified as contractors, not employees. Looking at you, Uber.

There is no shortage, of course, of organizations that seek to benefit from social goods such as education, transportation infrastructure and public health and safety while going to extremes to limit the amount they contribute to these goods through the payment of taxes. In a strongly worded analysis by the Institute on Taxation and Economic Policy, the Institute finds a widespread pattern of carefully constructed policies to engage in “tax avoidance” by many of the United States’ major firms. With government showing it has the capability and interest to help people that are hurting, perhaps calls on corporations to shoulder their fair share of the burden will become even louder.

Recognition that efficient systems can be brittle in an unhealthy way

In his insightful book, “When More is Not Better,” Roger Martin demonstrates that locally optimizing for profits intentionally or unintentionally creates brittle systems that are not sustainable. Instead of treating economic systems as deeply intertwined, parts are broken down and individually optimized, yielding a less resilient system overall. Martin himself echoes the idea that the New Deal was such a systemic intervention, touching many areas of human well-being at once.

Critique of “Predatory Value Extraction”

A longstanding critic of current corporate practice, in particular that of using stock buybacks to boost stock prices, rewards to shareholders and executive compensation is William Lazonic, of the University of Massachusetts at Lowell. His research suggests that corporate decision-making has gone from “an ideology of value creation to an ideology of value extraction” in many cases. This takes money out of firms that might otherwise be invested in R&D, in people, and in other areas that could build for long-term resilience. A poster child for this kind of action is Boeing, whose senior leaders made a series of unfortunate, financially motivated decisions, eventually causing it to settle fraud charges with the federal government. Lazonick has documented the financial decisions and tradeoffs made by the company extensively.

Toward new rules?

Judy Samuelson, founder and executive director of the Aspen Institute Business and Society program, has a new book out that sums up many of these concerns and argues for the adoption of radically new rules of the road for capitalism. Hers is perhaps the most blunt assessment of the failings of our current system: “Tell me which of the pressing issues of our time keep you awake at night, and I will tell you how the old rules of profit maximization and short-term thinking contribute to those problems.”

So we have a new administration in the United States, a new set of policy priorities for lawmakers and an epoch-defining global health emergency. Will we indeed see the introduction of changes with the breadth of the New Deal?

I’ve often used a simple formula for large-scale change because it’s simple! It was originally developed by Michael Beer at Harvard. It basically says that if you want change to occur, you need a solid level of constructive dissatisfaction (D) with the current state. This is coupled with a compelling vision for what the future state could be like (V). That is then knitted together with practices that remove obstacles blocking the path to that future state (P). We can conclude that many voices are constructively dissatisfied with the current state of affairs. The next challenge is establishing the vision for what is to come. I’ll look at that in the next thought spark.