The Circles Of American Financial Hell

There’s no escaping the pressure that U.S. inequality exerts on parents to make sure their kids succeed.

On May 5, 2016, Rebecca J. Rosen writes in The Atlantic:

More than a half-century ago, Betty Friedan set out to call attention to “the problem that has no name,” by which she meant the dissatisfaction of millions of American housewives.

Today, many are suffering from another problem that has no name, and it’s manifested in the  bleak financial situations of millions of middle-class—and even upper-middle-class—American households.

Poverty doesn’t describe the situation of middle-class Americans, who by definition earn decent incomes and live in relative material comfort. Yet they are in financial distress. For people earning between $40,000 and $100,000 (i.e. not the very poorest), 44 percent said they could not come up with $400 in an emergency (either with cash or with a credit card whose bill they could pay off within a month). Even more astonishing, 27 percent of those making more than $100,000 also could not. This is not poverty. So what is it?

As people move up the income ladder, they escape material shortages and consume more. They have “things”—goods, houses, and, most importantly, education—to show for their higher earnings, but they do not have healthy finances. Having those “things” is of course an improvement over not having them, but only for the very, very rich (or the very, very unusual) is there any real escape from the pressure-cooker of American household finances.

At its core, this relentless drive to spend any money available comes not from a desire to consume more lattes and own nicer cars, but, largely, from the pressure people feel to provide their kids with access to the best schools they can afford (purchased, in most cases, not via tuition but via real estate in a specific public-school district). Breaking the bank for your kids’ education is, to an extent, perfectly reasonable: In a deeply unequal society, the gains to be made by being among the elite are enormous, and the consequences of not being among them are dire. When understood mainly as a consequence of this rush to provide for one’s children, the drive to maximize spending is not some bizarre mystery, nor a sign of massive irresponsibility, but a predictable consequence of severe inequality.

There’s not a great term for this phenomenon and its consequences. Often, scholars and writers will use some variant of the phrase “financial insecurity” or “fragility” to describe it, but this does a disservice, implying that living paycheck-to-paycheck carries risks, that something bad could happen. But where would that show up in this measure? For millions of people without savings, those bad things have already come—they’ve had to make an emergency car repair or pay an unforeseen medical bill. They’d still answer a survey question about whether they had $400 on hand in the negative, and the survey would miss entirely that they had already experienced such a need. Risk is certainly part of the problem, but lots of families are facing issues that aren’t hypothetical and in the future—they are real and immediate.

Other existing terms fall short too. More colloquially, many refer to the speed of American life as a rat race, but that’s more of a reference to the hard and fast pace of work than it is to the broken finances many face at home (though surely the two are related, as the need for more money at least partially motivates that pace). Another, separate, phenomenon that people discuss is the “hollowing out” of the middle class, but that refers to the distribution of incomes becoming more polarized, leaving fewer in the middle, not the struggles faced by those still there.

Neal Gabler, the author of The Atlantic’s story on this problem, decides to go with the phrase “financial impotence,” which succeeds in capturing the powerlessness that many feel when confronting a financial abyss. There are ways in which this is apropos—men, in particular, have seen their earning power diminish in recent decades, and Gabler isn’t the first to draw a connection between financial power and sexual power. But this is an unfortunately narrow framing of a financial crisis whose casualties are so often women.

The failure to put a proper name on this dynamic is a part of a broader failure to understand it—and to see it as a problem at all. (Cognitive scientists have a great term for this—“hypocognition”—which refers to when, as linguist George Lakoff puts it, “the words or language that need to exist to frame an idea in a way which can lead to persuasive communication is either non-existent or ineffective.”) The most common and straightforward measures of households’ financial health look at income: Are incomes rising? How many people are earning less than $40,000? How many are earning more? But a measure of income alone completely misses the fact that few are getting off this earn-and-consume hamster wheel, even as they earn more. Wealth statistics do a better job capturing just how much trouble Americans have building up real assets and savings (and the answer is: a lot of trouble), but don’t capture at a week-to-week, month-to-month level how hard it can be to cover one’s bills.

In the absence of a good understanding of what is going on, people frequently disparage those who are suffering. There are two common reactions to The Atlantic’s May cover story. On the left there seems to be a lot of, “Boohoo, a rich person who spends too much. We have real poverty to worry about.” On the right there was more of, “He made bad decisions and blames the system, our glorious system, for it!”

Yes, it’s not real poverty, and, yes, Gabler made bad decisions. But Gabler’s straits, and the straits of millions like him, demonstrate gross dysfunction at the core of the American system. If millions of people with healthy incomes are in Gabler’s situation, something is very wrong.

What is that something that is preventing people from turning their earnings into prosperity? Many have pointed to wage stagnation as the culprit, arguing that of course Americans can’t get ahead—they don’t have enough money to get ahead! And making more money would certainly help Americans afford better quality goods, housing, services, and so on—all of which are incredibly important. But there is little reason to think that higher wages would enable families to build up a financial cushion that would allow them to sleep easy at night. In fact, even the very richest largely do not put away what economists would consider a healthy retirement savings. For the vast majority of people, higher wages do not seem to translate into financial security.

So it stands to reason that the problem—insofar as it is in any real sense a definable, single problem—is driven by something that is happening on the spending side of the equation. Why can’t people live below their means, save up some money, and kick up their feet?

The place to start is by looking at what they are spending their money—and particularly their loans—on. The biggest expenditure? Housing, by far. (Transportation is next, but a good portion of that—gas—is in some ways a housing cost as well, since it’s a function of one’s commute.) And the biggest sources of debt? Housing and education. The average loan burdens for mortgages and student loans dwarf auto loans or credit-card debt, the other major types of debt that Americans tend to carry.

Housing and education appear to be two distinct categories of spending, but for many families they are one and the same: For the most part, where a family lives determines where their kids go to school, and, as a result, where schools are better, houses are more costly. This is both cause and effect: Where houses are expensive, the tax base is bigger and schools have better resources, and where schools are better, there is more demand for housing. Zoning restrictions exacerbate this dynamic, because many rich municipalities with excellent public schools oppose the density that would allow more people to access their schools, which in turn drives housing prices up further. So in a sense, for many people, housing debt is education debt.

It’s all too clear why parents will spend their last dollar (and their last borrowed dollar) on their kids’ education: In a society with dramatic income inequality and dramatic educational inequality, the cost of missing out on the best society has to offer (or, really, at the individual scale, the best any person can afford) is unfathomable. So parents spend at the brink of what they can afford. By contrast, non-parents are far more likely to actually build up savings. (In cases where parents do manage to find affordable housing in a district with good-quality schools, it can make all the difference.)

It’s possible to imagine a country where the schools are good everywhere and prosperity is widespread. In such a country, parents don’t pour their resources into maximizing their kids’ educational quality, because their kids will have basically the same outcome anywhere. That’s not the country America is.

Gabler, for his part, sent his daughters to private school—an enormous expenditure, but one that many families prioritize at the expense of financial well-being for fear of missing out on the winnings in a winner-take-all system. As Gabler writes, “We resolved to sacrifice our own comforts to give our daughters theirs.” Considering the stakes, this is not a mistake (despite what many commenters have insisted) but a rational response to the unequal distribution of America’s good schools and its prosperity more generally. And there’s reason to think this may yet pay off for Gabler. True, he has no savings. True, he lives very meagerly. But he has two very well-educated and successful daughters. They are, in a sense, his retirement plan: Most likely, they will be in a position to care for him and his wife in their later years. We should all be so lucky.

In a sense, the people who say rising wages would help are on to something, but the key is not getting households more money—it’s about building a different system, one in which the upside to getting ahead isn’t so high, and the downside to falling behind isn’t so low. Better wages are a symptom of such a system, but they don’t themselves bring one about. That would require systemic changes—changes to the tax code, changes to corporate-governance practices, changes to anti-trust law, changes to how schools are funded, to name a few. Such reforms are far off, or may never come at all. So for the foreseeable future, Gabler’s problem may be yet unnamed, but millions will know it all too well.


Study By MIT Economist: U.S. Has Regressed To A Third-World Nation For Most Of Its Citizens

America divided – this concept increasingly graces political discourse in the U.S., pitting left against right, conservative thought against the liberal agenda. But for decades, Americans have been rearranging along another divide, one just as stark if not far more significant – a chasm once bridged

On October 22, 2017, Yossarian Johnson writes on The Intellectualist:

America divided – this concept increasingly graces political discourse in the U.S., pitting left against right, conservative thought against the liberal agenda. But for decades, Americans have been rearranging along another divide, one just as stark if not far more significant – a chasm once bridged by a flourishing middle class.

Peter Temin, Professor Emeritus of Economics at MIT, believes the ongoing death of “middle America” has sparked the emergence of two countries within one, the hallmark of developing nations.

In his new book, The Vanishing Middle Class: Prejudice and Power in a Dual Economy, Temin paints a bleak picture where one country has a bounty of resources and power, and the other toils day after day with minimal access to the long-coveted American dream.

In his view, the United States is shifting toward an economic and political makeup more similar to developing nations than the wealthy, economically stable nation it has long been.

Temin applied W. Arthur Lewis’s economic model – designed to understand the workings of developing countries – to the United States in an effort to document how inequality has grown in America.

The parallels are unsettling. As noted by the Institute for New Economic Thinking:

In the Lewis model of a dual economy, much of the low-wage sector has little influence over public policy. Check. The high-income sector will keep wages down in the other sector to provide cheap labor for its businesses. Check. Social control is used to keep the low-wage sector from challenging the policies favored by the high-income sector. Mass incarceration – check. The primary goal of the richest members of the high-income sector is to lower taxes. Check. Social and economic mobility is low. Check.

Temin describes multiple contributing factors in the nation’s arrival at this place, from exchanging the War on Poverty for the War on Drugs to money in politics and systemic racism. He outlines the ways in which racial prejudice continues to lurk below the surface, allowing politicians to appeal to the age old “desire to preserve the inferior status of blacks”, encouraging white low-wage workers to accept their lesser place in society.

“We have a structure that predetermines winners and losers. We are not getting the benefits of all the people who could contribute to the growth of the economy, to advances in medicine or science which could improve the quality of life for everyone – including some of the rich people,” he laments.

The antidote, as prescribed by Temin, is likely a tough sell in today’s political climate.

Expanding education, updating infrastructure, forgiving mortgage and student loan debt, and overall working to boost social mobility for all Americans are bound to be seen as too liberal by many policy makers.

Until the course is changed, he warns, the middle class will continue to fade and America will remain unsustainably divided.


America Has A Monopoly Problem—And It’s Huge

On October 23, 2017, Joseph E. Stieglitz writes in The Nation:


A pedestrian walks past the Google offices in Cambridge, Massachusetts. (Reuters / Brian Snyder)

There is much to be concerned about in America today: a growing political and economic divide, slowing growth, decreasing life expectancy, an epidemic of diseases of despair. The unhappiness that is apparent has taken an ugly turn, with an increase in protectionism and nativism. Trump’s diagnosis, which blames outsiders, is wrong, as are the prescriptions that follow.

But we have to ask: Is there an underlying problem that can and must be addressed?

There is a widespread sense of powerlessness, both in our economic and political life. We seem no longer to control our own destinies. If we don’t like our Internet company or our cable TV, we either have no place to turn, or the alternative is no better. Monopoly corporations are the primary reason that drug prices in the United States are higher than anywhere else in the world. Whether we like it or not, a company like Equifax can gather data about us, and then blithely take insufficient cybersecurity measures, exposing half the country to the risk of identity fraud, and then charge us for but a partial restoration of the security that we had before a major breach.

Some century and a quarter ago, America was, in some ways, at a similar juncture: Political and economic power seemed concentrated in a few hands, in ways that were inconsonant with our democratic ideals. We passed the Sherman Anti-Trust Act in 1890, followed in the next quarter-century by other legislation trying to ensure competition in the market place. Importantly, these laws were based on the belief that concentrations of economic power inevitably would lead to concentrations in political power. Antitrust policy was not based on a finely honed economic analysis, resting on concurrent advances in economics. It was really about the nature of our society and democracy. But somehow, in the ensuing decades, antitrust was taken over by an army of economists and lawyers. They redefined and narrowed the scope, to focus on consumer harm, with strong presumptions that the market was in fact naturally competitive, placing the burden of proof on those who contended otherwise. On this basis, it became almost impossible to successfully bring a predatory pricing case: Any attempt to raise prices above costs would instantaneously be met by an onslaught of new firm entry (so it was claimed). Chicago economists would argue—with little backing in either theory or evidence—that one shouldn’t even worry about monopoly: In an innovative economy, monopoly power would only be temporary, and the ensuing contest to become the monopolist maximized innovation and consumer welfare.

Over the past four decades, economic theory and evidence has laid waste to such claims and the belief that some variant of the competitive equilibrium model provides a good, or even adequate, description of our economy.

But if we begin with the obvious, opposite hypothesis—that what we see in our daily life is true, that our economy is marked in industry after industry by large concentrations of market power—then we can begin to simultaneously understand much of what is going on. There has been an increase in the market power and concentration of a few firms in industry after industry, leading to an increase in prices relative to costs (in mark-ups). This lowers the standard of living every bit as much as it lowers workers’ wages. When I wrote The Price of Inequality five years ago, I attributed much of the increase in inequality to this redistribution from workers and ordinary savers to the owners of these oligopolies and monopolies. I explained the multiple sources of this increase in market power. Some of it might have been a natural result of the evolution of our economy, growth in industries with what economists call network externalities, which might lead to natural monopolies; some was the result of a shift in demand to local services, segments of the economy where local market power, based on differential information was more significant. But much of it was based on changing the implicit rules of the game—new antitrust standards that made the creation, abuse, and leveraging of market power easier—and the failure of antitrust standards to keep up with the changing evolution of the economy. That was why two years ago, the Roosevelt Institute called for Rewriting the Rules of the American Economy, and over the past two years has amplified this message, especially as it relates to market power.

The problem is greater than what I have just indicated, and its consequences are perhaps more wide ranging than has been widely understood. This increase in market power helps explain simultaneously the slowdown in productivity growth, the sluggishness of the economy, and the growth of inequality—in short, the poor performance of the American economy in so many dimensions. This in spite of the fact that we are supposed to be today the most innovative economy ever.


Let’s begin with a simple question: Is there any reason why US telecom prices should be so much higher than in many other countries and service so much poorer? Much of the innovation was done here in the United States. Our publicly supported research and education institutions provided the intellectual foundations. It is now a global technology, requiring little labor—so it cannot be high wages that provide the explanation. The answer is simple: market power.

We used to think that high profits were a sign of the successful working of the American economy, a better product, a better service. But now we know that higher profits can arise from a better way of exploiting consumers, a better way of price discrimination, extracting consumer surplus, the main effect of which is to redistribute income from consumers to our new super-wealthy. Standard economic theory was based on the absence of discriminatory pricing and information imperfection—and in particular, the absence of distortionary asymmetries in information, whether those were natural or created by the market. The 21st-century digital economy has created opportunities for endogenous information asymmetries beyond anything that anyone could have imagined not that long ago. And this has enhanced the ability of firms not only to engage in price discrimination, but, to use Akerlof and Shiller’s colorful language, to phish for phools, to target those who they can take advantage of.

Firms like Microsoft led in the innovation in creating new barriers to entry. How could one compete with a browser provided at a zero price? New forms of predation were created, and pre-emptive mergers—buying cheap potential competitors before they could be a competitive threat and before an acquisition would receive antitrust scrutiny—became the norm. Even after Microsoft’s anti-competitive practices were barred, their legacy of market concentration continued.

But our “innovative” firms did not rest there. In credit cards and airline reservation systems, they created new contractual forms that ensured that even a firm with a small market share could and would charge exorbitant prices, thus guaranteeing that market power, however created, would be perpetuated. Chicago economists created new specious defenses, for instance, entailing two-sided markets (a “meeting place”—today, typically an electronic platform—for two sets of agents to interact with each other), that succeeded in persuading some courts to allow these abuses of market power to continue.

Perhaps long ago, the picture of innovative, if ruthless, competition and one monopolist succeeding another provided a good description of the American economy. But today we live in an economy where a few firms can get for themselves massive amounts of profits and persist in their dominant position for years and years.


The exploitation of firm market power is but half the story. We now face an increased problem of monopsony power, the ability of firms to use their market power over those from whom they buy goods and services, and in particular, over workers. In Rewriting the Rules of the American Economy we detailed how changes in institutions (unionization), rules, norms, and practices had weakened workers’ bargaining power, making it more difficult for unions to check pervasive abuses entailing corporate management taking advantage of deficiencies in corporate governance. Recent research, including that by Mark Stelzner of Connecticut College, in a paper aptly titled, “The new American way—how changes in labor law are increasing inequality,” has provided further confirmation of our perspective. So too has David Card and Alan Krueger’s work on the absence of negative employment effects from minimum wage increases. The flip-side of the resulting decrease in workers’ income and labor share is an increase in corporate rents.

What John Galbraith had described in the mid-century as an economy based on countervailing power has become an economy based on the dominance of large corporations and financial institutions.


Globalization was supposed to lead to a more competitive market place, but instead, it has provided space for the growth of global behemoths, who use their market power to extract rents from both sides of the market place, from small producers and consumers. Their competitive advantage is not based just on their greater efficiency; rather, it rests partly on their ability to exploit this market power and partly on their ability to use globalization to evade and avoid taxes. Just five American firms, Apple, Microsoft, Google, Cisco, and Oracle, collectively have more than a half trillion dollars stashed abroad as they achieve tax rates in some cases well under 1% of profits. We can debate what a “fair share” of taxes is, but what these companies pay is below any reasonable standard.

But the impact of globalization on workers has been perhaps its most devastating aspect, weakening their bargaining power, as firms threaten to leave the country in search of lower labor costs. Labor has become commodified. Firms demanded that the US give up one of its main areas of competitive advantage, its protection of property rights and the rule of law, through investment agreements which gave corporations investing abroad even more rights than domestic firms. The adverse effects on workers may not have just been an unintended side effect of globalization; it may have been at the center of the thrust for globalization, as I argue in my forthcoming book, Globalization and Its Discontents Revisited: Anti-globalization in the Era of Trump.


The national income pie, by definition, can be thought of as being divided into labor income, the return to capital, and rents. A stark aspect of growing inequality is the diminution in labor’s share, especially if we exclude the income of the top 1% of earnings, which includes those of CEOs and bankers. But there is increasing attention to the diminution of the share of capital. While there is no clear data source to which we can easily turn, we can make inferences with considerable confidence. For instance, from national income data, we can trace the increase in the capital stock. If anything, the required real return to capital has decreased, as a result of improvements in the ability to manage risk. Thus, the ratio of income to capital, thus estimated, to national income has gone down. If the share of labor income and the share of capital income have both gone down, it implies that the share of rents must have gone up—and significantly so.

Precisely the same results can be seen by looking at “stock” measures rather than flows. A variety of studies have noted that wealth has increased far more than the increase in capital—so much so that for some countries, the wealth income ratio is increasing even as the capital income ratio is decreasing. This disparity between wealth and the real value of the capital stock consists of a variety of forms of capitalized rents. These include land rents, returns on intangibles including intellectual property, rents firms achieve by exploiting the public purse, either through overpayment on sales to the government or underpayment in the acquisition of public assets, and, most importantly from the perspective of the topic of focus here, market power rents.

Multiple studies have confirmed these findings, some taking a close look at the corporate sector, others focusing on manufacturing. The latter shows a dramatic increase in mark-ups, as one would expect from an increase in market power. Mordecai Kurz of Stanford University has recently shown that almost 80 percent of the equity value of publicly listed firms is attributable to rents, representing almost a quarter of total value added, with much of this concentrated in the IT sector. All of this is a marked change from 30 years ago.


The adverse consequences of the resulting inequality are obvious. But there are numerous indirect consequences, which result in a more poorly performing economyFirst, this wealth originating from the capitalization of rents, what I shall call rent-wealth, crowds out capital formation. The weak capital formation of recent years is part and parcel of the growth of rents and rent-wealth—leading to economic stagnation. Secondly, with monopolies, the marginal return to investment is lower than the average return—they know that their prices may decline if they produce more—explaining the anomalous result of huge corporate profits but low corporate investment rates, even as the cost of capital has plummeted. Third, the distortions in the allocation of resources associated with market power lead to a less efficient economy. Fourth, in particular, market power has been used to stifle innovation—just the opposite of the claim of the Chicago School. There is evidence of a decline in the pace of creation of new innovative firms, and especially of new firms headed by young entrepreneurs. Fifthly, the ability of these new behemoths to avoid taxation means that the public is being deprived of essential revenues to invest in infrastructure, people, and technology—contributing again to our economy’s stagnation and distorting our economy by giving these firms an unfair competitive advantage. Sixthly, with money moving from the bottom of the pyramid to the top, which spends a smaller share of income, aggregate demand is weakened, unless offset by other macro-policies. In the decade since the beginning of the Great Recession, fiscal policy has been restrained and, given those constraints, monetary policy has been unable to fill the breach.


Americans Have More Debt Than Ever — And It’s Creating An Economic Trap

On October 22, 2017, Pedro Nicolai da Costa writes on Business Insider:

teoria risky black stone rock hanging crush smashGallery workers next to “Teoria” by Eduardo Basualdo at the Frame Gallery’s stand at the Frieze Art Fair in central London in 2013. REUTERS/Andrew Winning

  • An International Monetary Fund report finds that high levels of household debt deepen and prolong recessions.
  • US household debt is at pre-Great Recession levels.
  • Household debt jumped by over $500 billion in the second quarter to $12.84 trillion.

A scary little statistic is buried beneath the US economy’s apparent stability: Consumer-debt levels are now well above those seen before the Great Recession.

As of June, US households were more than half a trillion dollars deeper in debt than they were a year earlier, according to the latest figures from the Federal Reserve. Total household debt now totals $12.84 trillion — also, incidentally, about two-thirds of gross domestic product.

The proportion of overall debt that was delinquent in the second quarter was steady at 4.8%, but the New York Fed warned over transitions of credit-card balances into delinquency, which “ticked up notably.”

Here’s the thing: Unlike government debt, which can be rolled over continuously, consumer loans actually need to be paid back. And despite low official interest rates from the Federal Reserve, those often do not trickle down to financial products like credit cards and small-business loans.

Michael Lebowitz, the cofounder of the market-analysis firm 720 Global, says the US economy is already dangerously close to the edge.

“Most consumers, especially those in the bottom 80%, are tapped out,” he told Business Insider. “They have borrowed about as much as they can. Servicing this debt will act like a wet towel on economic growth for years to come. Until wages can grow faster than our true costs of inflation, this problem will only worsen.”

The International Monetary Fund devotes two chapters of its latest Global Financial Stability Report to the issue of household debt. It finds that, rather intuitively, high debt levels tend to make economic downturns deeper and more prolonged.

“Increases in household debt consistently [signal] higher risks when initial debt levels are already high,” the IMF says.

Nonetheless, the results indicate that the threshold levels for household-debt increases being associated with negative macro outcomes start relatively low, at about 30% of GDP.

Clearly, America is already well past that point. As households become more indebted, the IMF says, future GDP growth and consumption decline and unemployment rises relative to their average values.

“Changes in household debt have a positive contemporaneous relationship to real GDP growth and a negative association with future real GDP growth,” the report says.

Specifically, the IMF says a 5% increase in household debt to GDP over a three-year period leads to a 1.25% fall in real GDP growth three years into the future.

The following chart helps visualize the process by which this takes place:

Household Debt IMFInternational Monetary Fund

“Housing busts and recessions preceded by larger run-ups in household debt tend to be more severe and protracted,” the IMF said.

Is there a solution? If things reach a tipping point, yes, says the IMF — there’s always debt forgiveness. Even creditors stand to benefit.

“We find that government policies can help prevent prolonged contractions in economic activity by addressing the problem of excessive household debt,” the report said.

The IMF cites “bold household debt restructuring programs such as those implemented in the United States in the 1930s and in Iceland today” as historical precedents.

“Such policies can, therefore, help avert self-reinforcing cycles of household defaults, further house price declines, and additional contractions in output.”

It’s no coincidence that household debt soared across many countries right before the most recent global slump. The figures are rather startling: In the five years to 2007, the ratio of household debt to income rose by an average of 39 percentage points, to 138%, in advanced economies. In Denmark, Iceland, Ireland, the Netherlands, and Norway, debt peaked at more than 200% of household income, the IMF said.

In other words: We’ve seen this movie before.


How To End Crony Capitalism

On October 23, 2017, Robert Reich writes on TruthDig:

The largest corporations and richest people in America – who donated billions of dollars to Republican candidates the House and Senate in the 2106 election – appear on the way to getting what they paid for: a giant tax cut.

The New York Times reports that business groups are meeting frequently with key Republicans in order to shape the tax bill, whose details remain secret.

Speed and secrecy are critical. The quicker Republicans get this done, and without hearings, the less likely will the rest of the country discover how much it will cost in foregone Medicaid and Medicare or ballooning budget deficits.

Donald Trump has been trashing democratic institutions – the independence of the press, judges who disagree with him, uncooperative legislators – while raking in money off his presidency. But don’t lose sight of the larger attack on our democracy that was underway even before Trump was elected: A flood of big money into politics.

Lest you conclude it’s only Republicans who have been pocketing big bucks in exchange for political favors, consider what Big Tech – the industry that’s mostly bankrolled Democrats – is up to.

It’s mobilizing an army of lobbyists and lawyers – including senior advisors to Hillary Clinton’s campaign – to help scuttle a proposed law requiring Google, Facebook, and other major Internet companies to disclose who is purchasing their online political advertising.

After revelations that Russian-linked operatives bought deceptive ads in the run-up to the 2016 election, you’d think this would be a no-brainer. But never underestimate the power of big money, whichever side of the aisle it’s aimed at.

Often, it’s both sides. Last week The Washington Post and “60 Minutes” reported that Big Pharma contributed close to $1.5 million to Democrats as well as Republicans in order to secure enactment of the so-called “Ensuring Patient Access and Effective Drug Enforcement Act of 2016.”

This shameful law weakened the Drug Enforcement Authority’s power to stop prescription opioids from being shipped to pharmacies and doctors suspected of taking bribes to distribute them – a major cause of the opioid crisis. Last year, Americans got 236 million opioid prescriptions, the equivalent of one bottle for every adult.

Overwhelming majorities of House and Senate Democrats voted for the bill, as well as Republicans, and President Obama signed it into law.

There you have it, folks. Big money is buying giant tax cuts, allowing Russia to interfere in future elections, and killing Americans. That’s just the tip of the corrupt iceberg that’s sinking our democracy.

Republicans may be taking more big money, but both parties have been raking it in.

Average Americans know exactly what’s going on.

I just returned from several days in Kentucky and Tennessee, both of which voted overwhelmingly for Trump.

A number of Trump voters told me they voted for him because they wanted someone who’d shake up Washington, drain the swamp, and get rid of crony capitalism. They saw Hillary Clinton as part of the problem.

These people aren’t white nationalists. They’re decent folks who just want a government that’s not of, by, and for the moneyed interests.

Many are now suffering buyer’s remorse. They recognize Trump has sold his administration to corporate lobbyists and Wall Street. “He conned us,” was the most polite response I heard.

The big money that’s taken over American politics in recent years has created the biggest political backlash in postwar American history – inside both parties.

It’s splitting the Republican Party between its large corporate patrons and a base that detests big corporations and Wall Street.

Trump is trying to straddle both by pretending he’s a champion of the working class while pushing for giant tax cuts. But if my free-floating focus group in Kentucky and Tennessee is any indication, the base is starting to see through it.

Which you might think creates a huge opportunity for Democrats heading into the 2018 midterms and the presidential election of 2020.

Think again. Much of the official Democratic Party is still in denial, continuing to debate whether it should be on the proverbial “left” or move to the “middle.”

But when it comes to getting big money out of politics and ending crony capitalism, there’s no right or left, and certainly no middle. There’s just democracy or oligarchy.

Democrats should be fighting for commonsense steps to reclaim our democracy from the moneyed interests – public financing of elections, full disclosure of all sources of political funding, an end to revolving door between government and business, and attempts to reverse the bonkers Supreme Court decision “Citizens United vs. the Federal Election Commission.”

For that matter, Republicans should be fighting for these, too.

Heres’a wild idea. What if the anti-establishment wings of both parties came together in a pro-democracy coalition to get big money out of politics?

Then it might actually happen.

How to End Crony Capitalism


How Should Governments Address Inequality?

In the November/December 2017 issue of Foreign Affairs, Melissa S. Kearney writes:

In 2014, an unusual book topped bestseller lists around the world: Capital in the Twenty-first Century, an 816-page scholarly tome by the French economist Thomas Piketty that examined the massive increase in the proportion of income and wealth accruing to the world’s richest people. Drawing on an unprecedented amount of historical economic data from 20 countries, Piketty showed that wealth concentration had returned to a peak not seen since the early twentieth century. Today in the United States, the top one percent of households earn around 20 percent of the nation’s income, a dramatic change from the middle of the twentieth century, when income was spread more evenly and the top one percent’s share hovered at around ten percent. Piketty predicted that without corrective action, the trend toward ever more concentrated income and wealth would continue, and so he called for a global tax on wealth.

Like much of the popular commentary about inequality, Piketty’s book rested on an implicit moral claim—that wealth concentration beyond a certain degree violates the inherent sense of fairness on which a just society depends. But antipathy toward inequality alone cannot drive a policy agenda that will create a more egalitarian society. Critics of inequality need a compelling, evidence-based explanation for how and why the concentration of income and wealth at the top is problematic. Is this inequality the result of a purposely rigged game, or is it caused by unintentional distortions in a basically fair system? Whatever its causes, does inequality impede overall economic growth? Does it undermine widespread opportunity and upward mobility? Does it pose a threat to global capitalism and liberal democracy?



AI Will Put 10 Million Jobs At High Risk — More Than Were Eliminated By The Great Recession

On October 6, 2017, this article appeared on Research Briefs:

Automation is coming after jobs, from fast food workers to accountants. We analyzed which jobs are most — and least — at risk, given factors including tasks involved, the current commercial deployment of technology, patent activity, regulations, and more.

And the next phase of technological evolution is already underway: advanced neural networks that learn, adapt, and respond to situations.

With AI and automation advancing at a breakneck pace, society’s capacity to respond is being stretched to the limit.

10 million US jobs at high risk of disruption

Automation is already all around us. Cities are seeing front-end automated restaurants like Eatsa gaining popularity, while in factories automation has already arguably been a part of life for years (if not decades) in the form of heavy industrial and agricultural robots.

Analyzing the automation landscape, we found that 10 million service and warehouse jobs are at high risk of displacement within the next 5 – 10 years in the US alone. This includes jobs like cooks and servers, cleaners and janitors, as well as warehouse workers.

Meanwhile, nearly 5 million retail workers are at a medium risk of automation within 10 years.

To put these numbers into perspective, estimates are that over a few years the Great Recession of 2007 – 2010 destroyed 8.7 million jobs in the US.


With the emergence of industry-specific AI, the effects of automation — initially felt in manufacturing — are seeping into retail sales, restaurants, e-commerce, marketing, and even software development.

In this report, we take a closer look at the trend, including:

The rise of automation (thanks to open source and corporate interest)

How did we get here?

The concept of artificial intelligence was introduced in the 1950s. But the expectations for what an AI system is capable of achieving have changed over the years.

Innovation in microprocessors — particularly Nvidia’s graphic processing units (GPUs) — have played a large role. While Nvidia GPUs were initially targeted at the gaming industry, they have showed promising results in artificial intelligence, and are now widely used in training deep neural networks.

This, combined with easy access to massive amounts of data (from the internet, IoT devices, etc.), led to a new age for AI.

Meanwhile, several big corporations have open sourced their AI software libraries in recent years — another major accelerant for AI.

For example, Google open sourced its TensorFlow machine learning library in 2015, and hundreds of users have contributed back to it and sought to improve it. It’s a two-way street: startups can now build on existing frameworks instead of starting from scratch, and at the same time Google’s own AI research is accelerated by contributions from outside the organization.

Other libraries include Deeplearning4J from startup Skymind and Microsoft’s Cognitive Toolkit.

How corporations are beginning to harness automation

Last year, Foxconn — the largest contract manufacturer of iPhones — laid off 60,000 workers, replacing them with industrial robots.

Some of these were manufacturing robots called “Foxbots” that were developed internally by the company and can reportedly perform up to 20 common manufacturing tasks.

Foxconn has also backed external robotics startups. In Q3’17, it participated in a $20M seed round to Canada-based Kinova Robotics, which focuses on industrial service robots. Earlier this year, it also backed China-based cloud robotics company CloudMinds in a $100M Series A round.

In an interview with Digitimes last year, Dai Jia-peng, general manager in Foxconn’s Automation Technology Development Committee, outlined a 3-phase strategy for complete factory automation: automating dangerous tasks, process line automation, and a third phase that would leave only a minimum number of humans on board for tasks like logistics and quality control.

Nike and Reebok are looking to speed up the supply chain & logistics process as well, and will automate the manufacturing process in coming years to keep up with high consumer demand and quick turnaround times. In 2013, Nike invested in California-based industrial robotics startup Grabit, which is currently deployed in some of Nike’s manufacturing facilities.

But there are hurdles on the road to automation.

Dai Jia-peng told the South China Morning Post that “highly automated manufacturing is still an ideal,” since ever-changing consumer demands require highly flexible manufacturing robots that are able to adapt rapidly to design and manufacturing changes. However, Foxconn has fallen short of its 2011 forecast of installing 1 million robots in its factories in 3 years.

Like Foxconn, most manufacturing- and logistics-focused corporations are progressing on the road to automation in fits and starts.

The road to automation passes through warehouses and factories where robots collaborate with humans (rather than simply replace them).

Amazon, for example, already uses 45,000 robots in various warehouses, but at the same time is creating thousands of new jobs for humans in its new fulfillment centers.

Robots are still less-than-perfect at gripping, picking, and handling items in unstructured environments. Amazon’s collaborative warehouse robots perform much of the heavy lifting, while workers focusing on delicate tasks like “picking” items off shelves and slotting them into separate orders.

The trend stretches deep into physical retail, although we believe e-commerce is the much greater threat to retail jobs.

Walmart has patents for autonomous robots that attach themselves to shopping carts in order to move them around stores, along with drone delivery systems. (A detailed analysis of Walmart patents can be found here).

Robotics are penetrating deep into large businesses including retail, consumer, and medical applications.

At financial institutions, AI is transforming how investment decisions are made.

“It means some functions will change significantly in nature… And it might mean that positions will no longer be there in the future. All-in-all, over the coming five years, around 7,000 functions might be impacted by these effects…” Ralph Hamers, CEO of ING

In financial markets, global risk and asset management firm BlackRock laid off around 40 employees earlier this year, including portfolio managers and stock managers. BlackRock is moving towards robotic stock pickers instead.

Quant hedge fund Two Sigma is hiring researchers for its new deep learning team.

And well-known hedge fund Man Group is betting on AI to power algorithmic trading.


Beyond financial institutions, AI software has penetrated deeply into industries including healthcare, cybersecurity, and e-commerce.

The outsize impacts on the labor markets

The majority of AI applications today still require humans in the loop. For many blue- and white-collar jobs at risk, this means employers will still need hands on deck — just fewer of them.

We used US Bureau of Labor Statistics data to compile a list of occupations that are key to labor markets and job growth in the US. We diagrammed the key tasks involved, and used our diagram to determine the relative level of immediate risk from automation.

Our time frame was the next 5-10 years, and the relative risk of automation was based on factors including tasks involved, current commercial deployment of technology, patent activity, investment activity, technological challenges, and regulations.

We excluded categories such as heavy manufacturing and agribusiness where large-scale automation is already taking place.

Specifically, we looked at over 25 million jobs across 7 industries:

  • Nurses and health aides (6.9M workers)
  • Retail salesperson (4.6M)
  • Cooks and servers (4.3M)
  • Cleaners (3.8M)
  • Movers and warehouse workers (2.4M)
  • Truck drivers (1.8M)
  • Construction laborers (1.2M)

In addition to the jobs listed above, we take a look at the impact of automation on white collar jobs in later sections.


From auto tech to healthcare, startups are transforming industries with artificial intelligence. Look for Artificial Intelligence in the Collections tab.

Track AI Startups


2050+ items items

These are the professions at the greatest risk

Risk of automation is highest in predictable work environments in industries with lower regulations. This has already happened in manufacturing, and now at risk are over 10.5 million jobs in restaurants, janitorial roles, and warehouses.


“We are adding progressive automation right now. And we’re being transparent about it… We invest [the captured surplus] in retraining. We have people move from kitchen to finance…” – Zume Pizza CEO Alex Garden, This Week In Startups

Ease of automation is high for repetitive tasks like making coffee or preparing specific dishes.

This is particularly true in “fast-casual” chains with highly structured processes and menus.

Early-stage food-preparation startups using robotics and AI are proliferating, and operating in both B2B and B2C models.

California-based Zume Pizza, for instance, has raised $70.7M in funding. It uses the IoT and robotics for both automating pizza prep and cooking as well as direct-to-consumer delivery.

Other startups are building robots for specific tasks like flipping burgers or making salads and coffee. Their clientele includes cafeterias, fast food chains, and restaurants.

These startups have already piqued the interest of top VCs and corporate investors.

Google Ventures and Khosla Ventures recently funded burger-flipping robot Mometum Machines (funding and patents below).

Khosla Ventures also backed Cafe X Technologies in Q1’17, alongside The Thiel Foundation, Felicis Ventures, and Social Capital. Smart money VC Foundry Group backed Chowbotics in a $5M Series A round.

The chart below highlights recent deals to commercial food preparation robotics startups.

Startups working on digital payment and tabletop-ordering software are automating the tasks of cashiers and servers.

An example is fast-casual restaurant chain Eatsa. Its self-checkout and ordering process is gaining popularity, and Eatsa has expanded beyond San Francisco to New York and Washington DC. Fast food chains like McDonalds are following suit to maximize profits and cut costs: this year, McDonalds announced that it would replace cashiers with kiosks in 2,500 locations.

(You can read a detailed breakdown of the restaurant tech landscape here).


Consumer demand for smart home cleaning robots is increasing, and deals to on-demand home cleaning services are dwindling.

iRobot launched its Roomba home cleaning robots in 2002, and later developed robots for pool cleaning and floor mopping. It reported an $84M increase in US consumer robot revenue in 2016 compared to the previous year.

The company went public in 2005 after raising $37M from investors including FA Technology Ventures, Fenway Partners, iD TechVentures, iD Ventures America, and Trident Capital. It has applied for 480 patents since 2009.

Another startup, Neato Robotics, entered the market with a competing product, Botvac. Both companies were quick to ride the smart home wave, making their robots compatible with Amazon’s Echo device.

Neato was acquired in Q3’17 by Vorwerk Group, a German supplier of household products. Neato will continue selling its products in the United States post-acquisition.

On-demand cleaning and laundry startup deals have dropped in recent months, which could indicate decreasing market demand. Startups like HomeJoyTaskBob, and Happy Home Company all closed up shop after raising VC money.


Startups are also developing commercial cleaning robots.

Many early-stage commercial cleaning startups like CleanRoboticsRanMarineAdlatus Robotics, and Avidbots have cropped up in the last 2 years.

One of the late-stage companies here, Xenex Robots, develops UV disinfectant robots to reduce the rate of hospital-acquired infections. Over 400 healthcare facilities, including The New United Hospital Center, St Luke’s Hospital, and the Henry Ford Health System, reportedly use these robots. The startup recently raised $38M in a Series E round.


Robot-run warehouses are already in operation.

After Amazon acquired Kiva Systems in 2012 to automate its warehouse tasks, new startups emerged to fill Kiva’s shoes for the broader ecosystem.

As more people shop for products online, there is greater pressure on order fulfillment centers to ship items on time. Currently, “cooperative robots” work in collaboration with humans, although this would mean employers need fewer hands on deck.

As robots do most of the moving and heavy lifting, retailers and supermarkets want in on the trend.

Supermarket Giant Eagle took a minority stake in Pittsburgh-based Seegrid in Q3’16 for $12M. Seegrid develops vision guided vehicles (VGVs) as well as a fleet management platform.

In another example, DHL’s supply chain unit will use robots developed by startup Locus Robotics at its Tennessee life sciences facility. The robots will focus on picking and transporting items. DHL said this pilot project will “inform the potential for broader deployment across different parts of our business,” adding, “This is a natural evolution of our robotics program.”

There are still some challenges in warehouse automationStartups are beginning to address these.

Startups are beginning to address the challenges in robotic gripping and handling of delicate goods (considered to be some of the automation pain points). For instance, RightHand Robotics raised $8M in Q2’17 to develop piece-picking robots. Rethink Robotics, which focuses on the manufacturing sector, is also developing robots for logistics and material handling. It is backed by investors like CRV, Draper Fisher Jurvetson, and GE Ventures, and has raised $150M in total funding.

Professions at lower risk

Risk of automation is lower in unstructured or unpredictable work environments, as well as in industries involving high regulatory scrutiny. In some of the occupations below, there are also technological challenges to overcome.


E-commerce is a more immediate threat to in-store sales jobs than robots.

With name brand retail chains like Macy’s, Bebe, and Limited closing thousands of stores across the country, and rising competition from Amazon, retail salespersons are at a more immediate risk of job displacement from the rise of e-commerce than from in-store robots.

“The costs out of the gate for these robots are high, especially to run many of the tests. The use cases are still being understood… right now most retailers are trying to focus on their e-commerce integration with stores.” – Bill Lewis, consumer products EVP, Capegemini

Even though technologies like AI-based in-store advertising and self-checkout lines automate some aspects of a salesperson’s job, retail salespeople face a much more immediate risk of job loss due to the shift towards online shopping rather than the impact from in-store automation.

As consumers shift online, skills transfer may not follow a similar pattern for employees.

Startups are already developing AI-based chatbots, product recommendation algorithms, and targeted marketing analytics solutions for e-commerce. The new e-commerce “stack” is built around an AI core, from product recommendations to customer management and merchandising, leaving less room for job transfer from retail to e-commerce sales.

Some stores are beginning to test in-store robots.

In an effort to drive foot traffic and assist employees, however, some retail stores are turning to robots, testing the technology for inventory management and customer interactions.

The Lowe’s Innovation Lab partnered with startup Fellow Robots to build retail robots OSHBot and LoweBot. The lab is also experimenting with AR/VR solutions for customer assistance.

Target tested out Tally, a robot developed by Simbe Robotics, in San Francisco last year. California-based Bossa Nova Robotics is developing a retail robot to scan shelves and assist employees.

The adoption of in-store robots is still in its early stages, with no concrete measure yet of improved customer experience or cost-effectiveness for retailers.


Dynamic decision making in unpredictable environments make these patient-facing jobs hard to automate.

An Oxford University study published in 2013 estimated that nursing jobs have less than 1% probability of being automated. The high stakes in healthcare, unpredictable work environments, and the degree of emotional intelligence required combine to make the job of nurses and healthcare aides hard to automate.

Although research institutions in countries like Japan, which is home to a large elderly population, are focusing their R&D efforts on robots that can perform tasks like lifting and moving chronically ill patients, most startups are focused on support tasks like hospital logistics and virtual assistance.

Startups working on AI-based virtual assistants serve as middlemen between nurses and patients, reducing the need for frequent in-hospital visits. Consumer-focused robots and apps engage patients post-discharge in simple conversations. While startups like babylon assess a patient’s level of risk based on the response, others like integrate with biosensors and IoT devices to regularly monitor vitals.

Another area of focus for startups is support services like transportation and inter-hospital logistics, freeing up time for healthcare professionals by moving items for one room to another.

Pittsburgh-based Aethon (acquired in Q3’17 by ST Kinetics) has developed a robot called TUG for delivery and transportation of meals, medication, bed linens, and other goods in hospitals. Apart from strengthening its foothold in the United States, ST Kinetics plans to expand its Asia Pacific footprint through the acquisition. 


“Even putting aside the direct safety risks, truck driving is a grueling job that young people don’t really want to do. The average age of a commercial driver is 55 and rising every year, with projected driver shortages that will create yet more incentive to adopt driverless technology in the years to come .” –  Ryan Petersen, CEO of Flexport, LinkedIn Pulse

Fully autonomous vehicles are still in early stages of R&D.

The two biggest incentives for automating long-distance truck driving are road safety and driver shortage. The United States alone had a shortage of 48,000 truck drivers in 2015, according to the American Trucking Associations.

Although big tech companies and major auto giants like Apple, Baidu, Daimler, Ford, and Tesla are investing heavily in autonomous vehicle research, driverless trucks are still in early stages of testing, and on the whole the autonomous driving startup ecosystem is still in its early stages.

Companies are working on different aspects of automation, like sensors, perception systems, vision-based driver assistance, and high-accuracy maps, among other things. Two notable deals this year were Ford’s $1B investment in Argo AI, and Uber’s acquisition of self-driving truck company Otto.

Deals to startups specifically developing self-driving trucks (excluding driverless car startups like Zoox) started emerging in 2016.

California-based driverless truck startup, Starsky Robotics, raised seed funds from investors including smart money VC Data Collective, Unshackled Ventures, Y Combinator, and Trucks VC. Embark, which was backed by FundersClub in a seed round, later received a grant from The Thiel Foundation.

Even technologies like platooning require a human for initial/final legs.

Truck platooning has garnered interest from auto companies like Daimler and Volvo, the Department of Energy, and CVCs like Intel Capital and Nokia Growth Partners.

Although highway driving is considered easier to automate than in-city driving, initial/final legs in more congested areas will be more challenging, requiring a human driver. This is the case even with platooning, where a lead truck controls trucks behind it via Wi-Fi. While this technology has the potential to reduce manual labor, it faces regulatory challenges and still requires a human driver for non-highway driving.

Regulation is a point of friction slowing down automation.

Although trucking is thought to be at high risk of automation, this is unlikely to happen widely in the next decade due to regulatory challenges.

In addition to regulatory uncertainties, uncertain weather conditions and sharing the road with unpredictable human drivers are other challenges for fully autonomous cars/trucks.


The construction environment is unstructured and dynamic, requiring human supervision.

Parts of the process that are repetitive may be automated, but construction workers overall are at a low risk of displacement from robots.

Specifically, companies focused on mobile-first solutions have seen an uptick in deals. Some companies are also automating repetitive tasks like brick laying (such as Fastbrick Robotics, which was acquired by Australian holding company DMY Capital in 2015).

The demand for construction workers and a shortage of labor is giving rise to off-site solutions.

As shortage of construction laborers continues across the United States, some companies, like Blueprint Robotics, are focusing on assembly-line manufacturing solutions. The prefab housing sector has also seen some private market deals recently.

There is rising interest in using drones for site inspection to improve on-site worker safety.

Rising interest in inspection drones (over 40 deals went to inspection drone starups in 2016, compared to less than 25 the previous year) across industries for field survey and mapping functions has affected construction as well.

Construction and mining equipment manufacturer Caterpillar had invested in California-based Airware, which focuses on commercial drones and also is backed by investors like Intel Capital and Andreessen Horowitz. Airware’s solutions for the construction industry include topographic surveying, detecting breaklines, and computing stockpile volumes.

Other startups are working on both hardware and software solutions for inspection drones. While Kespry and Dronomy make their own drones, Skycatch develops analytics solutions for data collected using DJI drones.

Although there is renewed interest in 3D printing, it is still in nascent stages.

3D printing saw a resurgence of interest in 2016. Some of the recent news includes Apis Cor 3D-printing a house in 24 hours, and Google, IBM and Lowe’s investment in a metal 3D printing startup, Desktop Metal, with potential applications in a variety of industries.

But 3D printing in construction tech is still in its nascent stages. It also faces regulatory uncertainties — the materials used will go through significant regulatory scrutiny before commercial approval is granted.

White-collar jobs are also beginning to be automated

Startups developing what we call expertise automation and augmentation software (EaaS) will replace entry-level white collar jobs in areas like law (automatic document analysis and auditing), media (AI-based news curation and summaries), and even software development (early development phase and debugging).

Expertise Automation & Augmentation Software (EaaS) is focused on algorithms and technology that replicate human cognition. This software will augment and/or replace white-collar jobs — starting with low-level professional jobs. As with other disruptive trends, EaaS technology will become more sophisticated with time.


Artificial intelligence has huge potential to reduce time and improve efficiency in legal work. On the litigation side, natural language processing (text analytics) can summarize thousands of pages of legal documents within minutes — a task that might take a human counterpart several days to complete — while reducing the probability of error. As AI platforms become more efficient and commercialized, this will impact the fee structure of external law firms that charge by the hour.

Big multinational law firms are already preparing for the change AI will bring to the industry and capitalizing on it. For instance, Europe-based Pinsent Masons claims it has developed its own AI technology, called Term Frame, which has reportedly helped the firm in 7,000 matters ranging from dispute resolution to contract reviews.

Others are keeping tabs on the latest in tech through accelerator programs. For instance, NextLaw Labs, a wholly owned subsidiary of multinational law firm Dentons, invested in IBM Watson-powered AI legal tech startup ROSS Intelligence.

Legal tech AI startups saw about 7 deals last quarter. The top disclosed round was a $12M Series B round raised by Palo Alto-based Casetext, which is developing an AI-based legal research assistant, CARA. The round was backed by 8VC, Canvas Ventures, Red Sea Ventures, and Union Square Ventures.

Another startup, Israel-based LawGeex, raised a $7M Series A last quarter to use AI to automatically review business contracts. Smart money VC Floodgate seed-funded Text IQ, which is using natural language processing to help enterprise legal departments with investigations and document reviews.



Robo-advisors, or digital wealth managers/financial planners, have made the most progress towards fully-automating a conventional fintech business model. Private market investors have poured over $1.9B across 169 deals spanning 18 countries into robo-advisors since 2013.

Few other models within financial services have seen incumbent firms respond to an insurgent attack by launching competitive services as quickly. Looking at the wealth management market, it’s not hard to understand why. At risk is an estimated $36T that is projected to be passed from the Baby Boomers to millennials by 2061. Moreover, 70% of the non-retired population have no retirement savings, the Fed reports.

By automating the human advisor, robo-advisor startups have lower overhead, and in turn, have waged an industry pricing war by lowering fees and in some cases even eliminating them. Robo-advisors use a combination of algorithms to make risk-adjusted portfolio allocations and machine learning to learn from investor’s behavior to automatically tailor the portfolio when it swings outside of the prescribed recommendations. This is more cost efficient and in the long run could prove more profitable for the customers as compared to the traditional human management model.

The two earliest robo-advisors, Betterment and Wealthfront, are also the largest in terms of customer growth and assets under management. Combined, they manage approximately $17.5B in assets for over 535K client accounts, and have established themselves as household names.

While both are actively leveraging technology to further automate the wealth management profession, Wealthfront has been more actively moving away from the traditional human-advisor model. This year, Wealthfront launched a fully-automated financial planning service called Path, and a portfolio line of credit that streamlines the traditional bank loan process.

If robo-advisors continue to invest in building out their technology, by applying machine learning, the algorithm could learn to automatically adjust to a customer’s risk management thresholds throughout each life phase.


Although digital media deals dropped to the lowest number since Q2’12 last quarter, this year saw a $1B investment into China-based Toutiao, backed by CCB International and Sequoia Capital China. The startup, currently valued at $11B, uses artificial intelligence for personalized news recommendations, and is also reportedly developing an artificial news reporter.

Other startups in this space include Narrative Science, which develops a natural language generation tool called Quill, and Automated Insights, which was acquired in 2015 by Vista Equity Partners.


Early stage deals are emerging to startups focused on AI-based software testing, debugging, and basic frontend development.

One of the top rounds this year went to UK-based DiffBlue, which is developing AI to automate traditional coding tasks like bug fixing, custom code development, and translating code from one programming language to another. An Oxford University spinoff, it raised $22M in Series A from Goldman Sachs, Oxford Investment Consultants, and Oxford Sciences Innovation.

One of the earliest deals to startups using AI for software testing went to Applitool, which went on to raise $8M in Series B this year, backed by Smart Money VC Bessemer Venture Partners.

The image below shows recent deals to the space on the CB Insights platform (clients can track all AI deals by industry here).

What are the jobs of the future?

The scale of automation and progression in AI in recent years has created panic about a rapidly changing labor force.

Some industry experts and startup founders have been optimistic about the new jobs that will be created, enabling fewer people to do boring, dirty, or dangerous jobs.

However, what the jobs of the future will look like remains to be seen.

“A few years ago, Peter Lee, a vice president inside Microsoft Research, said that the cost of acquiring a top AI researcher was comparable to the cost of signing a quarterback in the NFL.” – Wired

Obviously if current trends are any indication, AI talent will continue to be in high demand. This was underscored recently by Chinese unicorn Toutiao (mentioned above), which is reportedly scouting top AI talent with $3M pay packages.

With big corporations like Google, Amazon, Apple, and Intel doubling down on their AI efforts, and top employees moving to competing companies or startups, there is a heated race to nab the crème-de-la-crème. The demand will continue to grow as AI is integrated into every industry.

But jobs in industries involving complex human interactions and high emotional intelligence, such as healthcare and education, will be least susceptible to automation.

Finally, as mundane jobs are automated, market competition for creative intelligence and the arts will increase. In-demand skills will include things like storytelling, strategic planning, and product design.


The advances in robotics — where AI software meets hardware — is taking automation beyond heavy industrial and manufacturing processes. This trend is already touching areas like physical security, transportation, cleaning services, warehouses, and restaurants.

In some occupations like trucking, technology and regulation have not caught up to the hype yet. But in others like restaurant services and commerce, the impact is already being felt.

Companies purely focused on AI software are removing the safety net from many white-collar jobs that were traditionally considered safe from automation. Startups are automating tasks in marketing, legal, HR, real estate, and financial services.

Retraining employees is a recurring theme. But with AI software now beginning to automate even white-collar jobs, it remains to be seen how many new jobs will be created, what they will be, and whether those who lose positions due to automation will be able to fill these new roles.

Gary Reber Comments:

This is the reality facing our society and the future for our children and grandchildren.

The choices for an economic system two failed system: capitalism, which should be properly called HOGGISM, due to the severe concentration of capital (non-human, such as IT) assets among a tiny already wealthy capital ownership class; and socialism, whereby the STATE is all-powerful and controlled by a tiny elite group of the wealthy.
The third alternative, which is called the JUST Third Way, ensures that EVERY child, woman and man is empowered to become an individual OWNER of wealth-creating, income-producing capital and to grow their ownership of productive capital assets (non-human, such as IT) simultaneously with the growth of the economy, using pure credit financial mechanisms such as insured, interest-free capital credit, repayable out of the future earnings of the capital assets formed and financed.
Support Monetary Justice at

Ralph Nader: How CEO Stock Buybacks Parasitize The Economy

On October 6, 2017, Ralph Nader writes on Evonomics:

The monster of economic waste—over $7 trillion of dictated stock buybacks since 2003 by the self-enriching CEOs of large corporations—started with a little noticed change in 1982 by the Securities and Exchange Commission (SEC) under President Ronald Reagan. That was when SEC Chairman John Shad, a former Wall Street CEO, redefined unlawful ‘stock manipulation’ to exclude stock buybacks.

Then after Clinton pushed through congress a $1 million cap on CEO pay that could be deductible, CEO compensation consultants wanted much of CEO pay to reflect the price of the company’s stock. The stock buyback mania was unleashed. Its core was not to benefit shareholders (other than perhaps hedge fund speculators) by improving the earnings per share ratio. Its real motivation was to increase CEO pay no matter how badly such burning out of shareholder dollars hurt the company, its workers and the overall pace of economic growth. In a massive conflict of interest between greedy top corporate executives and their own company, CEO-driven stock buybacks extract capital from corporations instead of contributing capital for corporate needs, as the capitalist theory would dictate.

Yes, due to the malicious, toady SEC “business judgement” rule, CEOs can take trillions of dollars away from productive pursuits without even having to ask the companies’ owners—the shareholders—for approval.

What could competent management have done with this treasure trove of shareholder money which came originally from consumer purchases? They could have invested more in research and development, in productive plant and equipment, in raising worker pay (and thereby consumer demand), in shoring up shaky pension fund reserves, or increasing dividends to shareholders.

The leading expert on this subject—economics professor William Lazonick of the University of Massachusetts—wrote a widely read article in 2013 in the Harvard Business Review titled “Profits Without Prosperity” documenting the intricate ways CEOs use buybacks to escalate their pay up to  300 to 500 times (averaging over $10,000 an hour plus lavish benefits) the average pay of their workers. This compared to only 30 times the average pay gap in 1978. This has led to increasing inequality and stagnant middle class wages.

To make matters worse, companies with excessive stock buybacks experience a declining market value. A study by Professor Robert Ayres and Executive Fellow Michael Olenick at INSEAD (September 2017) provided data about IBM, which since 2005 has spent $125 billion on buybacks while laying off large numbers of workers and investing only $69.9 billion in R&D. IBM is widely viewed as a declining company that has lost out to more nimble competitors in Silicon Valley.

The authors also cite General Electric, which in the same period spent $114.6 billion on its own stock only to see its stock price steadily decline in a bull market. In a review of 64 companies, including major retailers such as JC Penny and Macy’s, these firms spent more dollars in stock buybacks “than their businesses are currently worth in market value”!

On the other hand, Ayes and Olenick analyzed 269 companies that “repurchased stock valued at 2 percent or less of their current market value (including Facebook, Xcel Energy, Berkshire Hathaway and Amazon). They were strong market performers. The scholars concluded that “Buybacks are a way of disinvesting – we call it ‘committing corporate suicide’—in a way that rewards the “activists” (e.g. Hedge Funds) and executives, but hurts employees and pensioners.”

Presently, hordes of corporate lobbyists are descending on Washington to demand deregulation and tax cuts. Why, you ask them? In order to conserve corporate money for investing in economic growth, they assert. Really?! Why, then, are they turning around and wasting far more money on stock buybacks, which produce no tangible value? The answer is clear: uncontrolled executive greed!

By now you may be asking, why don’t the corporate bosses simply give more dividends to shareholders instead of buybacks, since a steady high dividend yield usually protects the price of the shares? Because these executives have far more of their compensation package in manipulated stock options and incentive payments than they own in stock.

Walmart in recent years has bought back over $50 billion of its shares – a move benefitting the Walton family’s wealth – while saying it could not afford to increase the meagre pay for over one million of their workers in the US. Last year the company bought back $8.3 billion of their stock which could have given their hard-pressed employees, many of whom are on welfare, a several thousand dollar raise.

The corporate giants are also demanding that Congress allow the repatriation of about $2.5 trillion stashed abroad without paying more than 5% tax. They say the money would be used to grow the economy and create jobs. Last time CEOs promised this result in 2004, Congress approved, and then was double-crossed. The companies spent the bulk on stock buybacks, their own pay raises and some dividend increases.

There are more shenanigans. With low interest rates that are deductible, companies actually borrow money to finance their stock buybacks. If the stock market tanks, these companies will have a self-created debt load to handle. A former Citigroup executive, Richard Parsons, has expressed worry about a “massively manipulated” stock market which “scares the crap” out of him.

Banks that pay you near zero interest on your savings announced on June 28, 2017 the biggest single buyback in history – a $92.8 billion extraction. Drug companies who say their sky-high drug prices are needed to fund R&D. But between 2006 and 2017, 18 drug company CEOs spent a combined staggering $516 billion on buybacks and dividends – more than their inflated claims of spending for R&D.

Mr. Olenick says “When managers can’t create value in the business other than buying their own stock, it seems like it’s time for a management change.”

Who’s going to do that? Shareholders stripped of inside power to control the company they own? No way. It will take Congressional hearings, a robust media focus, and the political clout of large pension and mutual funds to get the reforms under way.

When I asked Robert Monks, an author and longtime expert on corporate governance, about his reaction to CEOs heavy with stock buybacks, he replied that the management was either unimaginative, incompetent or avaricious – or all of these.

Essentially burning trillions of dollars for the hyper enrichment of a handful of radical corporate state supremacists wasn’t what classical capitalism was supposed to be about.

Ralph Nader: How CEO Stock Buybacks Parasitize the Economy



Study: Military Spending Ineffective For Creating Jobs

On September 29, 2017, the author of a study, Heidi Garrett-Peltier, is interviewed on the

Heidi Garrett-Peltier holds a Ph.D. in Economics from the University of Massachusetts, Amherst and works as an assistant research professor for Political Economy Research Institute (PERI). Her research focuses on the employment impacts of public and private investments, particularly in the realm of clean-energy programs. Heidi has written and contributed to a number of reports on the clean energy economy (see Recent publications, below). She has also written about the employment effects of defense spending with co-author Robert Pollin, consulted with the U.S. Department of Energy on federal energy programs and is an active member of the Center for Popular Economics.


Study: Military Spending Ineffective for Creating Jobs

SHARMINI PERIES: It’s the Real News Network. I’m Sharmini Peries coming to you from Baltimore. A new study by the Watson Institute at Brown University shows that defense spending is an inferior way to create jobs. The report, authored by Heidi Garrett-Peltier, compares how many jobs are created for each million dollars of public spending in different sectors.President Trump boasts a massive increase in military spending, and also promises to create jobs for Americans. Can the two things happen simultaneously? To discuss this question, I’m being joined by Heidi Garrett-Peltier, the author of the study that I mentioned. She is an Assistant Research Professor at the Political Economy Research Institute, PERI, at the University of Massachusetts, Amherst. She is a researcher in the impact of public and private investments on employment, especially investments in low-carbon economy. She authored the book, “Creating a Clean Energy Economy.” Heidi, I thank you so much for joining me today.

H. GARRETT-PELTIER: Thanks very much for having me, Sharmini.SHARMINI PERIES: Now Heidi, before we get into the nitty gritty of this study, let’s start off by giving us a sense of your general hypothesis here, and why you conducted this particular study in this economic climate.

H. GARRETT-PELTIER: Sure. We often hear the argument that military spending is good for jobs. And there are certainly lots of different sources of support for military spending. Military spending happens in just about every Congressional district, if not every single Congressional district across the U.S. So there’s been a lot of support for military spending. But one of the main arguments that we hear is that it’s good for job creation, and this argument has been around for decades. It used to be referred to as “military Keynesianism.”And so what we wanted to do was look at the question of how does public spending affect job creation? And if it’s true – and it is true that military spending creates jobs – how does that compare to other sectors? How does that compare to job creation in clean energy, or infrastructure, or education, or healthcare? So we’re not just saying “Does military spending create jobs?” It’s not a ‘yes’ or ‘no’ question. It’s what is the alternative? Is it the best way to create jobs? Could we be creating more jobs investing federal dollars in a different way? So that was really the overall theme that we wanted to look at. And the hypothesis was that some of the other sectors of the economy would actually create more jobs than the military.

SHARMINI PERIES: Now Heidi, during the Cold War, the U.S. spending on defense was even greater than today in terms of the ratio of spending to GDP. And the term “military Keynesianism” as you said, was coined by economists who argued that defense spending actually contributes to growth, which kept the U.S. ahead during Cold War, not just in terms of military power but also in terms of standard of living. What is your response to this?

H. GARRETT-PELTIER: What we should really be interested in is what is the trade off? Our federal budget comes from tax dollars, and people want to put their tax dollars to the best use possible. So if we’re looking at spending American tax dollars on something like the military, we want to know that that’s actually the best use of our tax dollars. So we can look at what are the trade-offs? What does it really cost to do this?

So one trade-off is if we’re investing, excuse me, if we’re spending on the military and we don’t have the money in the budget, we go into deficit spending. Then we’re taking on interest, and we’re paying interest on the loans that we need to take out for increased military spending. If we’re not doing that, then we’re taking money from another section of the budget, from other domestic spending in order to fund the military. So we are taking money from education or healthcare or infrastructure or emergency relief, which is particularly relevant right now. So we need to ask, is it worth paying the extra interest to take on this additional military spending? Or is it worth reducing spending in some other sector in order to support a greater military budget? Because those are the two choices we have.SHARMINI PERIES: Is there any military spending that’s good for the economy and for job creation? And I’m asking this because you were recently quoted in an article about the new Columbia class of nuclear submarines which cost $2.7 billion dollars each apparently, and the contract with the Navy for this was something like $5.1 billion dollars. But maybe there are other forms of spending that are more labor intensive, and are there such things that the military can do that it has a positive impact on the economy?H. GARRETT-PELTIER: Well, it’s true that within the military, there are very different types of spending. And actually one of the things that the military is doing that I find a very positive development is they’re becoming much more energy efficient and using much more renewable energy. So the military is the sector or the segment of the economy that uses the most energy of all. If you look at one institution using energy, the military is an extreme user of energy.

SHARMINI PERIES: And carbon emission contributor as well.

H. GARRETT-PELTIER: And, therefore, carbon emissions. Exactly. So you beat me to the punch. So they are using a lot of energy; they’re emitting a lot of carbon. And so one of the positive things that they’re doing is investing in energy efficiency and investing in renewable energy, and those are both ways to create jobs. In this case, you’re creating jobs in the military and you’re also expanding clean energy. So in that sense, it’s one of the best ways that we can spend money within the military sector.But if we look at outside the military sector, other industries, other sectors like healthcare and like education are much more labor intensive. So in the military, a lot of our spending goes not just to employ military personnel and civilians, but also to support payments for various capital, for equipment, for structures, for all kinds of capital investments. And if you compare that to something like education, where there are capital investments there, too, especially for educational buildings. But much more of the spending goes directly to labor; goes directly to employing administrators and teachers and the staff that work in schools, and that work throughout the supply chain, book publishers and bus drivers and so on. And so, it’s a much more labor intensive sector, and therefore, $1 million dollars goes a lot further in employing people than it does in the military.

SHARMINI PERIES: What about the issue of corruption and transparency as far as military spending is concerned? Civilian, public expenditure is normally regulated, but with the corporations in there and the military industrial complex, military spending is much more secretive. They don’t want to have their trade secrets, A, stolen by other nations, or they don’t want other companies to steal it. And the federal agencies that actually check, do the checks and balances in terms of audits and so on, is often kept out of the process because of this, the secrecy around the model of submarine or the airplane. And so all of this secrecy is justified. So how do we actually know whether $2.7 billion dollars for a submarine is a good price, and is it a good way to spend public dollars?

H. GARRETT-PELTIER: That’s an excellent question, and it is really difficult to track the money that goes through military, payments through military contracts. And this is one of the issues, is that a lot of the federal spending, a lot of our tax dollars are going to private companies in the form of contracts. And it becomes very difficult as you have a big contractor like Lockheed-Martin or Boeing, or the big corporations that are taking on these military contracts. Then they have subcontractors, and they have subcontractors, and it becomes really difficult to trace the money.And now, on top of that, you have the issue that you just raised, which is that there has to be some level of confidentiality for reasons of national security, and then much more of the money ends up being hidden. So we don’t know exactly how all of these dollars are being spent, but we know, for example, Lockheed-Martin gets upwards of 3 percent of the federal discretionary budget. So this is one company that’s getting a giant chunk of our tax dollars. And we can’t trace all of those dollars. We know the total amount that’s paid out in terms of the contract, but then we don’t know exactly where that goes afterwards. It becomes very difficult to trace.

SHARMINI PERIES: Now, one argument that you mentioned is that we are spending so much money on defense, arguing that this is for job creation, and that there are other sectors of the economy that are suffering, like education and healthcare and so on. How do we actually determine what is healthy, good defense spending and what isn’t?

H. GARRETT-PELTIER: You know, there are people who are working on exactly that question. So there have been a number of economists and others who have, in recent years, produced something called the “unified security budget.” And so, that looks at what do we actually need, concerned about national security. And we do think that there is a need for a defense budget. And the argument is not, in this case, to completely slash it to zero, but to look at what actually would keep us safe. And there are professionals working on these questions. How many aircraft carriers do we need? How much ammunition? How much would everything tally up to, and how does that compare to what we’re actually spending? And there are many types of weapons systems that are either redundant or that have had huge cost overruns that may never actually … vehicles that may never see the light of day, that may never be put into action, but millions and billions of dollars are spent on these. So there is a way to cut back the military budget by a significant percentage and still maintain the same level of security we have now, actually.But another question I think we need to think about is what does security mean in a broader sense? So our national security is not just the threat of attack from an outside force, but it’s also the attack from climate change. It’s the potential attack on our electrical grid that we’re more vulnerable to if we continue to have centralized fossil fuel power as opposed to more decentralized, renewable energy. It’s the vulnerability to our coastal cities that are, and to places like Puerto Rico that are just being ravaged by extreme weather events. And those extreme weather events are increasing due to climate change, due to increased moisture in the atmosphere. So all of those need to be, I believe, part of what we think of as our national security.

SHARMINI PERIES: And that’s a very good point because education, having a good healthcare system, having good housing for people, are also securing the population and their well-being. It’s a good way to look at some of these issues.Heidi, I thank you so much for joining us today.

H. GARRETT-PELTIER: Thanks very much for having me.

SHARMINI PERIES: And thank you for joining us here on the Real News Network.


How Economists Turned Corporations Into Predators

On October 5, 2017, William Laconic writes on Institute for New Economic Thinking:

The Idea That Businesses Exist Solely to Enrich Shareholders Is Harmful Nonsense

In a new INET paperfeatured in the Financial Times, economist William Lazonick lays out a theory about how corporations can work for everyone – not just a few executives and Wall Streeters. He challenges a set of controversial ideas that became gospel in business schools and the mainstream media starting in the 1980s. He sat down with INET’s Lynn Parramore to discuss.Lynn Parramore: Since the 1980s, business schools have touted “agency theory,” a controversial set of ideas meant to explain how corporations best operate. Proponents say that you run a business with the goal of channeling money to shareholders instead of, say, creating great products or making any efforts at socially responsible actions such as taking account of climate change. Many now take this view as gospel, even though no less a business titan than Jack Welch, former CEO of GE, called the notion that a company should be run to maximize shareholder value “the dumbest idea in the world.” Why did Welch say that?

William Lazonick: Welch made that statement in a 2009 interview, just ahead of the news that GE had lost its S&P Triple-A rating in the midst of the financial crisis. He explained that, “shareholder value is a result, not a strategy” and that a company’s “main constituencies are your employees, your customers and your products.” During his tenure as GE CEO from 1981 to 2001, Welch had an obsession with increasing the company’s stock price and hitting quarterly earnings-per-share targets, but he also understood that revenues come when your company generates innovative products. He knew that the employees’ skills and efforts enable the company to develop those products and sell them.

If a publicly-listed corporation succeeds in creating innovative goods or services, then shareholders stand to gain from dividend payments if they hold shares or if they sell at a higher price. But where does the company’s value actually come from? It comes from employees who use their collective and cumulative learning to satisfy customers with great products. It follows that these employees are the ones who should be rewarded when the business is a success. We’ve become blinded to this simple, obvious logic.

LP: What have these academic theorists missed about how companies really operate and perform? How have their views impacted our economy and society?

WL: As I show in my new INET paper “Innovative Enterprise Solves the Agency Problem,” agency theorists don’t have a theory of innovative enterprise. That’s strange, since they are talking about how companies succeed.

They believe that to be efficient, business corporations should be run to “maximize shareholder value.” But as I have argued in another recent INET paper, public shareholders at a company like GE are not investors in the company’s productive capabilities.

LP: Wait, as a stockholder I’m not an investor in the company’s capabilities?

WL: When you buy shares of a stock, you are not creating value for the company — you’re just a saver who buys shares outstanding on the stock market for the sake of a yield on your financial portfolio. Public shareholders are value extractors, not value creators.

By touting public shareholders as a corporation’s value creators, agency theorists lay the groundwork for some very harmful activities. They legitimize “hedge fund activists,” for example. These are aggressive corporate predators who buy shares of a company on the stock market and then use the power bestowed upon them by the ill-conceived U.S. proxy voting system, endorsed by the Securities and Exchange Commission (SEC), to demand that the corporation inflate profits by cutting costs. That often means mass layoffs and depressed incomes for anybody who remains. In an industry like pharmaceuticals, the activists also press for extortionate product price increases. The higher profits tend to boost stock prices for the activists and other shareholders if they sell their shares on the market.

LP: So the hedge fund activists are extracting value from a corporation instead of creating it, and yet they are the ones who get enriched.

WL: Right. Agency theory aids and abets this value extraction by advocating, in the name of “maximizing shareholder value,” massive distributions to shareholders in the form of dividends for holding shares as well as stock buybacks that you hear about, which give manipulative boosts to stock prices. Activists get rich when they sell the shares. The people who created the value — the employees — often get poorer.

###p“downsize-and-distribute” —something that corporations have been doing since the 1980s, which has resulted in extreme concentration of income among the richest households and the erosion of middle-class employment opportunities.

LP: You’ve called stock buybacks — what happens when a company buys back its own shares from the marketplace, often to manipulate the stock price upwards— the “legalized looting of the U.S. business corporation.” What’s the problem with this practice?

WL: If you buy shares in Apple, for example, you can get a dividend for holding shares and, possibly, a capital gain when you sell the shares. Since 2012, when Apple made its first dividend payment since 1996, the company has shelled out $57.4 billion as dividends, equivalent to over 22 percent of net income. That’s fine. But the company has also spent $157.9 billion on stock buybacks, equal to 62 percent of net income.

###pCapital Return Program.” Yet the only time in its history that Apple ever raised funds on the public stock market was in 1980, when it collected $97 million in its initial public offering.  How can a corporation return capital to parties that never supplied it with capital? It’s a very misleading concept.

The vast majority of people who hold Apple’s publicly-listed shares have simply bought outstanding shares on the stock market. They have contributed nothing to Apple’s value-creating capabilities. That includes veteran corporate raider Carl Icahn, who raked in $2 billion by holding $3.6 billion in Apple shares for about 32 months, while using his influence to encourage Apple to do $80.3 billion in buybacks in 2014-2015, the largest repurchases ever. Over this period, Apple, the most cash-rich company in history, increased its debt by $47.6 billion to do buybacks so that it would not have to repatriate its offshore profits, sheltered from U.S. corporate taxes.

###popen letter to Apple CEO Tim Cook, there are many ways in which the company could have returned its profits to employees and taxpayers — the realvalue creators — that are consistent with an innovative business model. Instead, in doing massive buybacks, Apple’s board (which includes former Vice President Al Gore) has endorsed legalized looting. The SEC bears a lot of blame. It’s supposed to protect investors and make sure financial markets are free of manipulation. But back in 1982, the SEC bought into agency theory under Reagan and came up with a rule that gives corporate executives a “safe harbor” against charges of stock-price manipulation when they do billions of dollars of buybacks for the sole purpose of manipulating their company’s stock price.

LP: But don’t shareholders deserve some of the profits as part owners of the corporation? 

WL: Let’s say you buy stock in General Motors. You are just buying a share that is outstanding on the market. You are contributing nothing to the company. And you will only buy the shares because the stock market is highly liquid, enabling you to easily sell some or all of the shares at any moment that you so choose.

In contrast, people who work for General Motors supply skill and effort to generate the company’s innovative products. They are making productive contributions with expectations that, if the innovative strategy is successful, they will share in the gains — a bigger paycheck, employment security, a promotion. In providing their labor services, these employees are the real value creators whose economic futures are at risk.

LP: This is really different from what a lot of us have been taught to believe. An employee gets a paycheck for showing up at work — there’s your reward. When we take a job, we probably don’t expect management to see us as risk-takers entitled to share in the profits unless we’re pretty high up.

WL: If you work for a company, even if its innovative strategy is a big success, you run a big risk because under the current regime of “maximizing shareholder value” a group of hedge fund activists can suck the value that you’ve created right out, driving your company down and making you worse off and the company financially fragile. And they are not the only predators you have to deal with. Incentivized with huge amounts of stock-based pay, senior corporate executives will, and often do, extract value from the company for their own personal gain — at your expense. As Professor Jang-Sup Shin and I argue in a forthcoming book, senior executives often become value-extracting insiders. And they open the corporate coffers to hedge fund activists, the value-extracting outsiders. Large institutional investors can use their proxy votes to support corporate raids, acting as value-extracting enablers.

You put in your ideas, knowledge, time, and effort to make the company a huge success, and still you may get laid off or find your paycheck shrinking. The losers are not only the mass of corporate employees — if you’re a taxpayer, your money provides the business corporation with physical infrastructure, like roads and bridges, and human knowledge, like scientific discoveries, that it needs to innovate and profit. Senior corporate executives are constantly complaining that they need lower corporate taxes in order to compete, when what they really want is more cash to distribute to shareholders and boost stock prices. In that system, they win but the rest of us lose.

LP: Some academics say that hedge fund activism is great because it makes a company run better and produce higher profits. Others say, “No, Wall Streeters shouldn’t have more say than executives who know better how to run the company.” You say that both of these camps have got it wrong. How so?

WL: A company has to be run by executive insiders, and in order to produce innovation these executives have got to do three things:

First you need a resource-allocation strategy that, in the face of uncertainty, seeks to generate high-quality, low-cost products. Second, you need to implement that strategy through training, retaining, motivating, and rewarding employees, upon whom the development and utilization of the organization’s productive capabilities depend. Third, you have to mobilize and leverage the company’s cash flow to support the innovative strategy. But under the sway of the “maximizing shareholder value” idea, many senior corporate executives have been unwilling, and often unable, to perform these value-creating functions. Agency theorists have got it so backwards that they actually celebrate the virtues of “the value extracting CEO.” How strange is that?

Massive stock buybacks is where the incentives of corporate executives who extract value align with the interests of hedge fund activists who also want to suck value from a corporation. When they promote this kind of alliance, agency theorists have in effect served as academic agents of activist aggression. Lacking a theory of the value-creating firm, or what I call a “theory of innovative enterprise,” agency theorists cannot imagine what an executive who creates value actually does. They don’t see that it’s crucial to align executives’ interests with the value-creating investment requirements of the organizations over which they exercise strategic control. This intellectual deficit is not unique to agency theorists; it is inherent in their training in neoclassical economics.

LP: So if shareholders and executives are too often just looting companies to enrich themselves – “value extraction,” as you put it – and not caring about long-term success, who is in a better position to decide how to run them, where to allocate resources and so on?

WL: We need to redesign corporate-governance institutions to promote the interests of American households as workers and taxpayers. Because of technological, market, or competitive uncertainties, workers take the risk that the application of their skills and the expenditure of their efforts will be in vain. In financing investments in infrastructure and knowledge, taxpayers make productive capabilities available to business enterprises, but with no guaranteed return on those investments.

These stakeholders need to have representation on corporate boards of directors. Predators, including self-serving corporate executives and greed-driven shareholder activists, should certainly not have representation on corporate boards.

LP: Sounds like we’ve lost sight of what a business needs to do to be successful in the long run, and it’s costing everybody except a handful of senior executives, hedge fund managers, and Wall Street bankers. How would your “innovation theory” help companies run better and make for a healthier economy and society?

WL: Major corporations are key to the operation and performance of the economy. So we need a revolution in corporate governance to get us back on track to stable and equitable economic growth.  Besides changing board representation, I would change the incentives for top executives so that they are rewarded for allocating corporate resources to value creation. Senior executives should gain along with the rest of the organization when the corporation is successful in generating competitive products while sharing the gains with workers and taxpayers.

Innovation theory calls for changing the mindsets and skill sets of senior executives. That means transforming business education, including the replacement of agency theory with innovation theory. That also means changing the career paths through which corporate personnel can rise to positions of strategic control, so that leaders who create value get rewarded and those who extract it are disfavored. At the institutional level, it would be great to see the SEC, as the regulator of financial markets, take a giant step in supporting value creation by banning stock buybacks whose purpose it is to manipulate stock prices.

To get from here to there, we have to replace nonsense with common sense in our understanding of how business enterprises operate and perform.