In an interview with the Harvard Business Review on February 9, 2015, Lawrence H. Summers discusses the work of the Commission on Inclusive Prosperity and why executives and business owners should care about it. Summers answers questions like, How does corporate governance need to change in your view? Can the private sector create a more inclusive economy or is it up to policymakers to solve the problem?
February 9, 2015
Harvard Business Review
There’s growing recognition that CEOs are paid too much, that shareholders are pocketing too large a share of corporate profits, and that high levels of inequality are bad for economic growth. The case for paying workers more keeps getting made — again, and again, and again — and yet the gap between the rich and the rest continues to grow, within countries and companies alike.
Rising income inequality is a feature of most advanced economies, and yet we seem hard-pressed to do anything about it.
Enter a new report from the Center for American Progress, co-led by Larry Summers, the Harvard economist, and Ed Balls, a Member of the British Parliament. Their answer to inequality and stagnant living standards is “inclusive prosperity,” an economic agenda centered around middle-class growth.
I asked Summers about his proposals, and business’s role in implementing them. A condensed and edited version of our conversation follows.
What is inclusive prosperity and why should executives and business owners care about it?
Inclusive prosperity refers to the idea that growth — growth that is inclusive, that benefits the middle class — is essential if nations are going to flourish.
Without middle class growth, institutions lose legitimacy. The American example is degraded. The ground is fertile for populist revolt. The debt becomes much more difficult to manage and cynicism corrodes the functioning of the society.
I think it is a lesson of history that businesses succeed or fail with nations. It is very difficult for any company to be highly successful based in a country whose national economy is stagnating. And it is much easier for businesses to succeed when a society is functioning well.
Can the private sector create a more inclusive economy or is it up to policymakers to solve the problem?
The right public frameworks are in the interest of the majority of businesses that very much want to do the right thing. That means cracking down on tax shelters that give some businesses a competitive advantage. That means strengthening regulation where some businesses are putting competitive pressure on others by skimping on safety, by denying workers basic benefits, or by operating with dangerous degrees of leverage. Support for making certain benefits like family leave universal serves the interests of good employers against ruthless employers who may seek to gain advantage by skimping on basic benefits.
What would change about the relationship between firms and workers in a more inclusive economy?
I think we need to encourage employers to make decisions based on something other than the ruthless reduction of costs. During the time I was president of Harvard, we instituted a policy that if the university outsourced a function like, for example, janitorial services or cafeteria services, those to whom it outsourced had to pay the same wages that the university paid. That did not mean we were biased against outsourcing if it was more efficient, but it did mean that we were leveling the playing field and did not permit outsourcing to gain advantage simply by holding down wages.
I would hope that businesses would increasingly see the need to invest first in their own interest in their workforces. Study after study suggests that programs of family leave reduce workers’ stress and permit workers to continue working in ways that benefit not just the worker but also their employer.
I also think that businesses need to contemplate their relationship with their workforces in other ways. Experience suggests that where workers are empowered, given more voice to shape the terms of their employment and the way in which they work, productivity very often increases.
There’s an increasing body of evidence suggesting the desirability of profit-sharing as a way of enfranchising and motivating workers. And there is even some increasing suggestion in the data that corporate leaders who maintain a philosophy of teamwork where, for example, pay differences within a firm are limited and where everyone shares in success and failure, get better results.
What about the role of more traditional unionization and collective bargaining?
I think that one has to maintain a sense of balance. Unions are right in some employment contexts. Unions do not add value in other employment contexts.
What I think is important is the principle enshrined in U.S. law that workers should have the right to collectively bargain if that is what they desire. I am concerned that in recent times that right has eroded because employers have been permitted to retaliate against those who seek to organize workers with impunity.
At the same time, I would be the first to recognize that in a world where American businesses are competing very vigorously with foreign competitors, in a world where domestic competition has increased substantially, prudent union leaders will need to recognize that they need to cooperate with management to craft employment arrangements that better serve workers, but also serve the objectives of competitiveness and economic efficiency.
I think there’s substantial scope for thinking about new compacts between firms and workers in the mutual interest of both.
What about freelancing and the sharing economy and the idea that the contract between companies and workers is changing?
I’m a believer in the sharing economy. I feel proud to serve on the board of Lending Club. I certainly see enormous efficiencies coming and improvements in economic performance coming from efforts to deploy the economies of housing resources more efficiently through firms like Airbnb or transportation resources more efficiently through firms like Uber and Lift.
I believe that much of the way capitalism moves forward is through organizational innovation as well as through technological innovation and the so-called share economy represents an important example of that.
At the same time, in crafting our social institutions we need to recognize that if workers are going to have more flexible terms of employment, are going to work in many cases more irregularly and for different employers, that the provision of a basic social safety net is something that’s going to be done less by employers and that there will be a role for government in picking up the slack. I think that recognition has to inform the approaches that we take.
How does corporate governance need to change in your view?
I was struck that in a panel discussion at Davos the FT journalist Martin Wolf asked those present what fraction of them felt that share value maximization was in the interests of the broader economy.
At Davos, hardly a Marxist redoubt, 70% of those who answered the question initially said they felt that it was not, as currently practiced, in the long run interests of economies.
I believe in general that property rights are immensely important and I support the idea that businesses should be run for the benefit their owners. And I think that efforts to align those who are managing business with the interests of shareholder owners are for the most part a positive thing.
But I have the concern that as currently practiced, our institutions provide overly high-powered incentives for taking steps that will benefit share prices in the very short run and insufficient incentives for taking steps that will benefit the company and both shareholders and stakeholders over the long run. I think this tendency has been exacerbated by some of the extremes of activism that we have witnessed in recent years where activists have sought to disrupt or restructure companies for the sake of an immediate payout even at some sacrifice of long-run interests.
I am sympathetic to proposals for staggered boards of directors to make activists’ attacks more difficult. I am sympathetic to proposals to provide particular protections for long-term holders of companies who can serve as validators that management’s long-term investment plans are in fact in the interests of corporate shareholders.
The ruthless short-run Darwinianism of the activists is not the way forward. Neither, though, is the belief that management should be entirely trusted independent of the results they have generated. What we need is to find a way of empowering active, critical, but patient board members for our leading corporations.
Anything else you’d like to add?
Just one thing. John Kennedy in his inaugural address famously said, “Ask not what your country can do for you, ask what you can do for your country.”
That was a reasonable thing to say that called forth a great response at a time when American middle-class standards of living had grown rapidly. When millions of families were enjoying the benefits of the interstate highway system. When a generation had been educated by the GI Bill. When millions of families were fulfilling their version of the American Dream by living in their home in the suburbs thanks to the FHA and a range of successful public investments.
If it’s much more difficult to call on Americans today, that is importantly a reflection of the failure of the national economy to deliver rising standards of living in the way that it once did for the middle class.
http://larrysummers.com/2015/02/09/what-business-can-do-to-save-the-middle-class/#more-3884
What a shallow interview. Not only does the Harvard Business Review interviewer not know the hard and poignant questions to ask Larry Summers, but Summers never zeros in on the issue of concentrated capital ownership and the failed structure of the system to facilitate “inclusive prosperity” by way of broadening personal capital ownership.
These academics and business leaders live in a world not really understanding the binary nature of productive input––human and non-human, and can ONLY come up with patch solutions such as “giving workers more voice to shape the terms of their employment…” or “support for making certain [worker] benefits…universal.”
Summers is completely ignorant of how business corporations function based on “return on investment” management when he proclaims “I think we need to encourage employers to make decisions based on something other than the ruthless reduction of costs.” Businesses are constantly pursuing reductions in operational costs to stay competitive. Companies strive to keep labor input and other costs at a minimum in order to maximize profits for the owners. They strive to minimize marginal cost, the cost of producing an additional unit of a good, product or service once a business has its fixed costs in place in order to stay competitive with other companies racing to stay competitive through technological invention and innovation. Reducing marginal costs enables businesses to increase profits, offer goods, products and services at a lower price, or both. Increasingly, new technologies are enabling companies to achieve near-zero cost growth without having to hire people. Thus, private sector job creation in numbers that match the pool of people willing and able to work is constantly being eroded by physical productive capital’s ever increasing role.
And while Summers thinks that “businesses need to contemplate their relationship with their workforces in other ways…where workers are empowered, given more voice to shape the terms of their employment and the way in which they work [because] productivity very often increases…, and where everyone shares in success and failure, get better results.” he offers no real “inclusive” solution for such participation other than to say “there’s an increasing body of evidence suggesting the desirability of profit-sharing as a way of enfranchising and motivating workers,” but NEVER uses the OWNERSHIP word to suggest that workers actually become share owners of the companies they work for, entitled to full-earnings dividend payouts and not just hopeful for some “profit-sharing” bonus at the end of the year.
While he expresses concern for “the extremes of activism” and “activists’ attacks” that would cause business and societal turmoil, he NEVER addresses the advancing reality that a JOB is no longer the means to a sustainable financial future for the vast majority of Americans. Nor does he address that no one is immune to losing their job, which causes a sudden negative economic impact on individuals and families.
Summers is all for supporting “the idea that businesses should be run for the benefit their owners,” but does not address the necessity for business corporations to be broadly owned by their employees and other citizens.
Summers needs to understand that tectonic shifts in the technologies of production are occurring at an exponential pace with the result that continual invention and innovation finds ways to make human labor unnecessary as more and more sophisticated “tools” (aka capital assets such as structures, machines, robotics, super-automated production, computerized operations, etc.) replace workers, while at the same time “work” more efficiently and at less cost to produce the products and services needed and wanted by society. The result is that a tiny few define the wealthy ownership class, while the vast majority of Americans teeter on the verge of being broke.
Summers reflects on a “range of successful public investments” including the FHA program that facilitated broadening home ownership, but stops there. For example, he could have suggested using private capital credit insurance or a government reinsurance agency (ala the Federal Housing Administration concept) to facilitate broadening personal capital ownership simultaneously with the growth of business corporations growing the economy. After all, a home does not produce income, but capital assets are constantly formed on the basis that they will generate earnings for their owners. Thus, capital asset formation is inherently insurable.
While universal capital ownership needs to be the structural reality of a future economy, no one in academia or politics, including Summers, talks about the “hows” to reform the system to ensure that EVERY citizen has the equal opportunity to acquire personal ownership of wealth-creating, income-producing capital assets without the requirement of past savings or inheritance. We need to face up to the fact that our so-called leadership is oblivious to what is going on. Nor are they offering any REAL solutions, only band-aid patches, to reforming the system to produce the result of broadened personal capital ownership by EVERY child, woman, and man simultaneously with the future growth of the economy.
Summers represents the financial elite in terms of brain power to devise solutions to a broken system resulting in a broken economy, but sadly disappoints. And remember that presidential aspirant Hilary Clinton is supportive of the work of the Commission on Inclusive Prosperity, which thus far has drawn a blank on devisings reforms to the system that would really put our nation on a path to inclusive prosperity, inclusive opportunity, and inclusive economic justice.
We should ALL be questioning our political representatives as to why they keep on dancing around the real issue of concentrated OWNERSHIP of wealth-creating, income-producing capital assets. It’s as if they do not really understand private property ownership principles or they are afraid that the American people will not comprehend. I say that even though Summers states: “I believe in general that property rights are immensely important and I support the idea that businesses should be run for the benefit their owners,” he does not pose the question of who should be the owners in the future?
If there are leaders out there who really want to boost the income of the vast majority of Americans and empower them to be “customers with money” to support the products and services needed and wanted, then they need to be advocating for broadened capital ownership.
The solution is a paradigm shift with a focus on Every Citizen An Owner of wealth-creating, income-producing capital assets, as such future capital assets can be formed to grow the economy, without taking from those who are already secure as a minority member of today’s the wealthy capital ownership class.
The solution is also one that each one of us is responsible for advocating, as this is the surest way to ensure that the politicians will shift their thinking and begin to really lead us onto a path of inclusive prosperity, inclusive opportunity, and inclusive economic justice.
To find out how this objective can be achieved without the requirement of withholding consumption and savings, read about the proposed Capital Homestead Act at http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/ and http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/. See http://cesj.org/learn/capital-homesteading/ and http://cesj.org/…/uploads/Free/capitalhomesteading-s.pdf.
Concurrent with the CHA are necessary reforms to Monetary Justice at http://capitalhomestead.org/page/monetary-justice.
