We’re On The Road To Somewhere
The incentive-oriented world view explored at length by works like Freakonomics really appeals to me. Making every social issue into a problem of inadequate or incorrect incentives can really help to clarify things and point toward a practical solution.
Now looking at trends in labor, business, and capital over the last few decades, incentives gone wild seem to be at the heart of recent economic successes and failures.
At bottom, “incentives” are a tool. They aren’t an end in themselves, but can be extremely helpful for reaching already agreed upon goals. But in order to use them effectively, these end goals need to be articulated. Without clear direction, even the most innocuous incentives can lead to perverse outcomes.
And if you believe MIT economist Frank Levy, that’s what our “shareholder-value-driven system” has become, a perversion. Without “built-in mechanisms of regulation,” this new system drove “its incentives geared CEOs toward shortsightedness and recklessness.”
In his New York Magazine profile of Mitt Romney, Benjamin Wallace-Wells explains the dangers:
“But these episodes still give a glimpse of the evolving problems of the shareholder-value model, and some consequences of the trade-off we made of stability for growth. In some economic moments, a program of radical efficiency can be good for society; at other times, when there is less fat to trim, the same instincts can lead a company to cannibalize itself. ‘We’re living in a crueler capitalism,’ Fligstein says. By some measures, he adds, ‘we’ve gone really quite a long ways. And nobody really knows what the tipping point is, or how you go back.’”
The potential outcome of this managerial exuberance is explained by Frank Rich in the pages of the same issue:
“Its once minor financial-services subsidiary, G.E. Capital, metastasized over the past 30 years in sync with the growth of the new Wall Street. In 1990, G.E. Capital accounted for just a quarter of G.E.’s overall profits, but by 2007, on the eve of the crash, it had gobbled up 55 percent of the bottom line. Its sophisticated gambling strategies, like those of the big banks it emulated, amounted to an ingenious get-rich-quick scheme for high-rollers until the bottom fell out, taking shareholders and employees, not to mention the country, down with it. G.E. Capital’s dependence on short-term credit was so grave that it forced G.E. to cut back its dividend for the first time since the thirties and to turn to Buffett for a $3 billion emergency cash infusion in the dark days of October 2008.”
G.E. was not alone here though. Throughout the economy over the last couple of decades, money got weird:
“At its core, Das says, financialization was based on two things. ‘One is debt, more debt, and more debt.’ The other is packaging risk: ‘not really eliminating it, but shifting it around.’”
Incentives don’t fail. People fail. And the financialization and share-value driven incentives that have seemingly led the country astray, or at least into stagnant middle class wages and high unemployment, aren’t necessarily broken, just part of an incomplete equation.
But to find out what a complete version of that equation would look like, we have to make some value judgments. As far as I can tell, the market is not very instructive when it comes to deliberating on values. Prices? Sure. But to decide upon what outcomes we want the market itself to lead to, meta-institutions need to begin the discussion. That includes the media, churches, and all manner of public associations, including public representative bodies like state legislatures and Congress, as well as local town halls.
Unfortunately, our modern procedural republic rebels against this sort of value-laden discourse where ever it arises. We have conservatives who make value judgments concerning abortion and gay rights, but see no place for similar pronouncements in the marketplace. Liberals have bleeding hearts, but push civil liberties to the point of making discussion of community and cultural values moot, or at least subordinate to the procedural values found in the Bill of Rights. Then there are libertarians who don’t feel comfortable enforcing any morality, unless it’s the one that establishes negative rights and then banishes most ethical concerns that arise afterward.
However, resist as we might, the Tea Party and Occupy Wall Street have pushed values to the forefront of national debate, at least for the time being. Even the Pope has weighed in, which, despite the Catholic Church’s moral failings, and my own atheism, even I find refreshing.
Cultural warfare is a way to get the Republican base out, and class warfare is, or at least use to be, a dependable way for firing up Democratic labor. In the end though, they amount to a similar thing: a heated but necessary fight over what kind of society we want to live in and what we want the future to be like.
How else do we come to an agreement on reforming Social Security and Medicare? On what our national interests are and what kind of sacrifice we’re willing to maintain to continue protecting them? On what kinds of regulations and tax arraignments that will make it possible? How do we figure out how to get from here to there if no one’s willing to put forth a vision for what there looks like?
If this recession has taught us one thing it should be that economic growth won’t look like it used to in the past. And yet no one, it seems, has any ideas on what to do about globalization, automation, or the paradox of saving more in a consumption driven economy.
I’m not advocating the kind of class violence that Isquith fears, but there are real divisions that platitudinous solutions and empty promises alone won’t bridge.