Paying more for less

But more politics for free

Photo by Max Bender on Unsplash

Hello,

Welcome to Known Unknowns, a newsletter that keeps politics out of buying beer and lawn chairs.

Democracy works, kind of

There is a debt ceiling deal. I hate this news story and always try my best to avoid it, since it always seems to have a resolution where no one gets what they want, but we keep spending anyway. It takes too much pointless energy, and I think the trillion-dollar coin idea is annoying. But it also shows the government works, since there was compromise and more debt.

Let’s just hope the new debt that is issued this week does not break the bond market. It is already a little fragile. That is my read on the economy these days; I don’t know if we will have a recession, but we are much more vulnerable to shocks—even shocks that would normally not be a big deal.

Everything is expensive and terrible

I can’t believe it needs saying, but inflation is bad. It makes everyone poorer. And even if the rate of price growth is slowing, it is still much higher than we’ve gotten used to. It is also still faster than wage growth for most people. And throw in a labor shortage, and it feels like you pay a lot and get much less in terms of goods and services. This was apparent in the Fed’s latest survey of the financial well-being of households. About two-thirds say they are substituting into lower quality goods and services or just consuming less or not at all.

And yet, we get regular lectures that things really aren’t so bad and that all these surveys where people think the economy is not in good shape just show people don’t know how good they have it. How about they feel that way because they are legitimately poorer than they used to be?

I can see why it is confusing. After all, nominal wages are higher, unemployment is still less than 4%, and people keep spending. Though if they are buying less of what they’d like, that’s not so great. Some people are speculating that we are already in a recession; it is just a stealth recession with very low unemployment. I can see the argument because many people are worse off; they have jobs but are poorer. But I think this stretches the definition of recession, and it may be wishful thinking that inflation can go away while unemployment is 3.7%. Odds are, it will take more than that.

After I wrote this column, I got a few emails that said my observation—that inflation is hurting households—is a conservative position. This seems odd to me. I thought everyone cared about lower-income households, which are hardest hit by rising prices. If that can’t bring both sides together, I am not sure what will.

Bring back shareholder primacy

Between the controversies at Disney, Bud Light, and Target, I think we need a return to shareholder primacy.

In 2019, many of the biggest American CEOs signed a manifesto declaring the end of shareholder primacy and embracing a new stakeholder model. With shareholder primacy, the main objective of a corporation is to maximize profits, both long- and short-term profits, because that is what boosts share prices and dividends, and shareholders like that. With the stakeholder model, a corporation has many other objectives: worker well-being, the environment, and the good of society. That may sound nice, but often, these stakeholders have competing objectives, and choosing who gets priority is a question of values.

When Milton Friedman argued for shareholder primacy, he said that a CEO should not forgo profits to exercise his personal values. It is not his money to spend, and not everyone shares his values, nor should they. And worse, I blame the multi-stakeholder model  for making everything feel more political.

Now, I realize even before 2019, companies were getting more political, but it got ramped up several notches in 2020. And now, everything you buy feels like a political statement. And even innocuous well-intentioned marketing campaigns that aim to give visibility to marginalized groups are taken as an explicit endorsement of a more divisive political agenda. I think shooting Bud Light cans in protest is stupid. But I get that people feel frustrated that everything is political and often not their politics.

And even if corporations mostly did pursue profits after 2019, and the stakeholder manifesto was a cynical ploy to appease young workers, get ESG capital, or avoid regulation, rhetoric matters. Before 2019, people could shrug at corporate pandering because it all seemed like a marketing ploy, and who can argue with selling lawn chairs and beer to the trans community? It is a growing demographic.

But in the context of announcing that you are doing it to make the world a better place, it strikes a different tone. And since stakeholder capitalism is about choosing between competing values, it is political. And now everything is worse for profits and society, since it adds to division and rancor.

Milton Friedman was right; shareholder primacy is better for corporations and society.

If CEOs really want to save the world, they should do the brave thing: announce an end to stakeholder capitalism and go back to just worrying about profits.

I will be moderating a panel this week on the same issue; if you are in DC, you should come by.

State and local finances are in deep trouble

And this matters much more to your daily life than the debt-ceiling theatrics in Washington. David Schleicher has a wonderful new book on how we can get out of this mess. I spoke to him about it and suggest you have listen. He offers some good solutions to a serious growing problem and the sooner we do something the better.

Until next time, Pension Geeks!

Allison