An Economics of Polarization

This post is a response to yesterday’s discussion in Davidson Now’s pop-up MOOC,  “Engagement in a Time of Polarization”.   The key provocation for the discussion was Chris Gilliard’s great essay Power, Polarization, and TechThe video of the hangout discussion is embedded at the end of this post for you.


In his discussion of social media rules and platforms, Chris poses an interesting hypothetical:

If we had social media and rules for operating on platforms made by black women instead of bros, what might these platforms look like? What would the rules be for free speech and who gets protected? How would we experience online “community” differently than we do now? Would polarization be a bug instead of a feature? The historical disenfranchisement of black and brown women and men is compounded by these same folks still being walled off and locked out of tech institutions through hiring policy, toxic masculinity at the companies, and lack of access to venture capital. “Black women are the most educated and entrepreneurial group in the U.S., yet they receive less than 1% of VC (Venture Capital) funding.”

I’m going to argue that if Facebook or Twitter or one of the other monster social media platforms had been staffed and created by black women (or just about any other historically disenfranchised group) the results would likely have been the same.  I’m not arguing an “all people are corrupt” position. Rather, I want to highlight the institutional conditions and economics by which these firms come about.  The institutional framework in the US, combined with some straight forward economics pretty much sets the path. Any group of entrepreneurs would likely end up in the same place, behaving the same way, and producing the same polarizing products/services.

I say this not as a voice of gloom, but rather to highlight that if we want to avoid or dismantle the damaging polarization and surveillance capabilities of these social media mega-platforms, we need to make institutional and legal changes.  And those legal and institutional changes may be in areas you don’t suspect such as antitrust law. First, I want to bring to light two different aspects of the institutional economics of these firms. The first is price discrimination and the second is corporate capital funding structures, especially for start-ups.

The bros that started, coded, and grew these social media platforms such as FB, Twitter, Google, and even Amazon, didn’t set out to polarize the population. Each had an interesting concept to provide people such as search (Google), interpersonal social connection (FB), or quick broadcast chat (Twitter).  But those services required large user bases and people were unlikely to pay for the privilege. So a monetization model was needed. Advertising and/or data sold to advertisers. Most folks know that these platforms with their data enable advertisers to “target” specific higher-probability buyers for their products.  But just increasing the likelihood that a specific ad will result in a sale isn’t the gold.

The gold is in price discrimination. Always has been.  I don’t have time now to fully explain price discrimination, but there’s a Wikipedia entry on it and an Economics Help site entry for it. An individual’s real demand curve for a product is very difficult to ascertain. It’s a hypothetical. It’s how many would you buy at all the possible prices? Looked at from a seller’s viewpoint, it’s what’s the maximum price I can charge and still sell as many as I want?  If the seller knows, he/she can charge prices that capture all the consumer surplus value for themselves instead of sharing the joint benefits of the transaction. 

If an advertiser/seller can gain enough information about a potential buyer’s real demand curve, it’s the route to profit nirvana. But historically it’s been difficult to do price discrimination. For products, there’s that pesky Robinson-Patman antitrust law. Often it’s been done via proxy indicators of group preferences – think Ladies’ Night at the bar or higher prices for business travellers on airlines. Getting the knowledge has been tough.  Big data from social media solves that problem.  That’s why social media data is so valuable and profitable and why FB/Google/Amazon/Twitter chose that route to monetization instead of subscriptions or memberships.

This price discrimination behavior is nothing new and neither are the abuses. It’s what made John D. Rockefeller’s Standard Oil so profitable and so socially destructive 120 years ago.  The urge to find ways to price discriminate is inherent in corporate market behavior.  The only limits legal.  We used to pass and enforce antitrust laws against such behavior, but that’s been considered bad form ever since the Reagan administration listened to the Chicago boys back in the early ’80’s.

To enable price discrimination practices, the social media monsters had to find more and more data about each and every user.  There’s a direct line between individualized data and monetization.  Now the marketers don’t call it discrimination. They call it differentiation.  They want to know exactly how every person is different from everybody else and find little homogenous groups to put them in.

The purpose was economic & marketing discrimination/differentiation. But once the differences are revealed. Polarization, a side effect, is all about finding differences, not commonalities. Finding commonalities doesn’t make money for marketers.

I don’t think any of the bros that did this at these platforms intended or planned to polarize the nation. It was just an unintended, unconsidered consequence.  Don’t get me wrong. I’m not absolving them of responsibility.  Sometimes unintended consequences could and should have been foreseen. It’s kind of like drunk driving. Very few, if any, people set out to drink and the drive with intent of killing somebody.  It happens because they didn’t think and didn’t foresee the consequences of their actions.

Given the incentives and demands of capital structure, I think any group would likely have gone for the price discrimination-data collection jackpot, especially since there are no legal guard rails against it and they likely would have to as a startup.

Now that gets us to another question. Why did FB/Twitter/Google, et al, find the need to maximize the monetization?  Well, here we can fault them. The reason was greed but again it was unintended, unforeseen consequences.  Their choice of capital structure forced it. They went for too much cash at the IPO’s.

Chris is right. Black women as a group are highly entrepreneurial. But there are maybe 4 motivations for entrepreneurship. Some do small businesses because there’s no other option – that’s a lot of present black women entrepreneurship. Some start businesses just to be left alone (like me 20 yrs ago). Some just want to get stinking rich and leave (Peter Theil, Paul Allen). And some want to get stinking rich, build a huge legacy corporation, and rule the world (Zuckerberg, Bezos).  FB/Google/Twitter et al chose to go the IPO route to become stinking rich.  Google, IIRC, did it twice.  The cash they gathered from those IPO’s did more than fund operations and some growth. It was in excess of their real cash needs. The consequence was they needed continuous high growth rate in both users and profits.  That’s what Wall Street style financial capitalism both rewards and requires. With the high, continuous growth, there’s no stock premium No stock premium = low stock price = founder isn’t really that rich.

My argument is that some other group, black women or POC or whoever, might have done things differently, but only if they had set different goals of not getting rich. Unfortunately, the US corporate funding and legal systems don’t really allow for enterprises that in-between. It’s either struggle for funds as a non-profit or go for continuous profit maximizing high growth.

There’s not really an institutional option for funding “just adequate to provide a utility-like service”.  To get the funding to start, any group effectively commits to the profit max, high growth route.  And that commitment drives the monetization strategy of data collection to seize the gold of price discrimination.

Is it all gloom and doom? No. I don’t think so.  But arguments that simply ask for firms and developers to be more “ethical” or even just more diverse aren’t likely to work in my opinion.  We need to change a lot of the rules of the game.

I do have suggestions for those changes, but this more than enough for tonight.

 

Is “Right to Work” About Freedom?

It’s Rick Snyder’s incredible flip-flop here in Michigan on so-called “Right to Work” legislation and his claims that it’s about “freedom” that brings me back to blogging.  Lately I’ve been getting increased questions about what “Right to Work” really means.  So, let me try to cut through the Orwellian rhetoric and explain.

So called “Right to Work” laws have absolutely nothing to do with “freedom” for workers. The “freedom” talk is purely a made-up rhetorical lie intended to get gullible workers to support something that most likely is not in their personal best interest.  Supporters of  so-called “Right to Work” laws (RTW)  claim it’s about establishing the “freedom to not be forced to join a union”, that it’s about “freedom of association”.  But that is an absolute falsehood.  Forcing someone to join a union as a condition of employment is called a “closed shop” rules.  Ever since the 1948 Taft Hartley (a US law covering all states) “the closed shop” has been illegal. Let me repeat for clarity. Forcing someone to join a union as a conditon of employment has been illegal everywhere, including Michigan, since 1948.  RTW laws change nothing in this respect.

But Taft Hartley law also says that if a union is certified as bargaining representative, then the union must bargain on behalf of ALL employees, whether union members or not.  Further all employees are covered by the union-negotiated contract, whether members or not. A union becomes the certified bargaining representative by a vote of ALL employees at some point in time, with a majority necessary to cerify.  A union may be de-certified later by another majority vote of all employees (whether members or not).  Until the union is decertified, the non-member employees benefit from the contract and are covered by the contract.  If a union is certified to represent, non-members are not free to strike different deals or contracts.

Employees who choose to be union members pay dues.  In return for dues, members receive the benefits of bargaining, the contract, and due process representation. Members also get to vote on union leadership and maybe participate in social events put on by the union, depending on which union it is. Non-members do not get the social benefits or voting rights, but they DO get the benefit of the contract, bargaining, and due process.  In return, non-members do not pay “dues”. Rick Ungar in Forbes clarifies:

But did you know that Taft-Hartley further requires that the union be additionally obligated to provide non-members’ with virtually all the benefits of union membership even if that worker elects not to become a card-carrying union member?

By way of example, if a non-member employee is fired for a reason that the employee believes to constitute a wrongful termination, the union is obligated to represent the rights of that employee in the identical fashion as it would represent a union member improperly terminated. So rock solid is this obligation that should the non-union member employee be displeased with the quality of the fight the union has put forth on his or her behalf, that non-union member has the right to sue the union for failing to prosecute as good a defense as would be expected by a wrongfully terminated union member.

Obviously, the Taft Hartley law puts a burden on unions. A certified bargaining agent union must bargain on behalf of all workers, whether they are members or not.  That costs the union money and time.  Yet,the union may only collect “dues” from members.  Herein lies the difference between RTW states and the rest. The rest should properly be called “union shop” states.  In a “union shop” state such as Michigan was until yesterday (Dec 11, 20123), the certified union may charge “agency fees”, not “dues”, to non-member employees on whose behalf they bargain. Agency fees are required by law of non-member employees in union shop states. In RTW states, non-member employees do not have to pay agency fees. In RTW states, non-member employees are allowed to benefit from the contract and protections and bargaining power of the union without paying a dime to support the bargaining activities.  The agency fees are established in union shop states to reimburse the union for it’s costs of negotiating, bargaining, etc.  RTW laws are all about how much money gets paid to certified unions and have nothing to do with “freedom”.

How Much Are Dues vs. Agency Fees?  Enter the Supreme Court

For a few decades after passage of Taft Hartley in 1948, many unions set the agency fee at the same dollar amount per month as the dues.  Obviously this encourages membership since an employee faces a choice of same cost for non-membership vs membership, yet membership brings some marginal benefits beyond the bargaining and contract benefits.  But, a few decades ago (I forget exactly when – I think it was in the 1980’s), some non-members of unions in union shop states sued to not have to pay the agency fee, claiming a First Amendment free speech violation. The logic of their argument was essentially that:

  • union shop labor laws required non-members to pay agency fees to an organization, the union, of which they were not a member and with whom they may disagree politically
  • unions use some of their money for political “speech” purposes: campaign contributions, advertising, lobbying, etc.
  • Ergo, the laws were forcing the non-members to supoort political speech with which they disagreed and therefore should be considered unconstitutional under the US Constitution 1st Amendment.

Countering the non-member’s argument was the union position that the non-members benefit from the union’s activity (bargaining) and should be required to contribute their share to the costs.  If non-members were not required to monetarily support the union’s bargaining and other activities, then it would constitute an unfair burden on members (they would be forced to pay to provide union benefits to non-members) which is itself probably unconstitutional (see Beverly Mann about Article 1, Section 10)

The Supreme Court “split the baby” and developed a solution that acknowledged both sides.  The Supreme Court established that required agency fees are indeed constitutional (ie. “union shop” laws are constitutional).  But, it also said that requiring non-members to support political speech and activities with which they disagreed was not constitutional.  The solution lay in establishing that unions report the amounts they spend on political speech and adjust the agency fee to be some fraction of the dues.  In other words, if the dues for members were $40 per month and the union reported that 20% of it’s total expenses were for political speech activities, then the agency fee would have to be set at $32. This decision was one of a few public policy and economy changes that helped to reduce union influence in the political arena starting in the 1980’s.  There were other more significant ones such as the PATCO strike, but the Supreme Court decision did help reduce marginally some of the money and support unions could provide to union-friendly politicians.  The effect was most pronounced in private sector unions.

Indeed, the battle over RTW laws vs. union shops has nothing to do at all with “freedom for workers”.  It has everything to do with money for political campaigns and political activities.  Historically, most union political activities have been in support of Democratic candidates, but not always.  Republicans perceive they can gain a significant advantage and perhaps a permanent power majority if they can weaken unions and cut-off the political support unions provide to Democrats while simultaneously increasing their financial support from corporations and billionaires, neither of which face any limitations any more.  It is no accident that police unions are exempt from the new RTW law in Michigan.  Police unions such as the FOP can continue in Michigan to demand either dues or agency fees from all police officers.  Why?  Police unions have historically been the unions most likely to support Republican candidates, particularly for court judgeships.

NOTE: Despite continuing really heavy work duties, I am going to try to make posts in the next few days about “Whether and How RTW Laws Weaken Unions and Affect Workers” and “What the Evidence Shows on RTW Laws and Economic Growth”. 

Too Big to Fail Should Be Too Big to Exist

Against Monopoly has a great graphic that shows a big part of the problem with our financial sector and our economy.

How the Too Big to Fail Banks Got  So Big

How the Too Big To Fail Banks Got So Big

The four banks shown above are the four largest banks in the U.S.: JP Morgan Chase, Citi, BofA, and Wells Fargo.  Together they dominate the financial industry. If you add in Goldman Sachs and Morgan Stanley, the domination is near complete.  They all received large bailouts in the 2008-09 crisis.  Today they are much larger than when we entered the crisis. As the graph shows, none of these banks grew so large by “natural” or “organic” means.  They didn’t grow because they offered better or more efficient services to customers.  They didn’t “win in the marketplace” by competing better.  They simply bought the competition.  It’s domination by merger.  The U.S. banking system which at one time was very competitive and decentralized with literally thousands of very competitive banks is now dominated by a few.  We call it oligopoly on the way to monopoly.

When very, very large banks get too big, they become “Too Big To Fail”.  That means, if the banks were allowed to fail because of bad decisions, bad management, or bad investments, it would set off a domino effect throughout the economy and financial system.  That would punish all of us and not just the bank’s owners.  This, of course, is what happened in 2008 when Lehman Brothers was allowed to fail.  It set off a financial panic where banks wouldn’t / couldn’t loan to each other (or anyone else).  Result:  big bailouts of big banks.

But it doesn’t have to be this way.  Yes, once we have a “too big to fail” bank and it fails, then there’s pretty much no choice but to bail them out.  There are choices about the structure of the bailout. We could have set up the bailouts in a way that the economy wins and the failed managers and bank owners suffered.  We didn’t.  The Federal Reserve, the Bush administration, and then the Obama administration made it a priority to keep the bank managers and bank owners whole.  The economy has suffered from a slow recovery partly as a result.

But bailouts shouldn’t be necessary because we shouldn’t allow the banks to become this big in the first place.  Again, we have a choice.  We could have prevented some or all of these mergers.  The laws are on the books to do it.  Washington, following the failed anti- antitrust philosophy of the Chicago school since the 1980’s simply doesn’t challenge many mergers these days.  It’s bad for campaign contributions.  Besides we’re supposed to believe that a market fairy will make it all right.  Instead of challenging and stopping some of these mergers, both the government and The Federal Reserve have actually facilitated and acted as match-maker for many of the mergers.  In March 2008, when Bear Stearns failed, The Federal Reserve offered a deal to JP Morgan Chase.  If Chase would buy Bear Stearns, The Fed would reimburse Chase for any losses over a set amount.  Heads Chase wins. Tails Chase wins.  Nice deal.

We have other choices as well.  In other industries historically when the private competition in the market led to monopoly or near-monopoly outcomes, the government chose to regulate the industry as a public utility.  We did it in the 1920’s and 1930’s with the electrical industry.  Your local electrical company wasn’t always a regulated utility.  At one time it was ravenous and rapacious private monopoly just like these banks are becoming.  When Standard Oil became a monopoly over a hundred years ago, we sued and broke it up into a bunch of other companies.

This complicity in allowing the big banks to become Too Big To Fail is among the types of policies that the protesters of #OccupyWallStreet want changed.  Me, too.

Gov. Rick Snyder Invokes the Magic Job Genie

The mantra of Republican governors (and in Congress) has been that taxes must be cut in order to create jobs.  In previous posts I’ve dealt with the confusion about how federal level changes income taxes  might or might not affect the strength of the economy. Most of the federal tax discussion focuses on individual income taxes.  But at the statehouse level, Republican governors have been pounding a theme that claims business tax cuts will drive economic growth in general and job creation in particular.

In Michigan, Republican Governor Rick Snyder has just pushed through a massive restructuring of Michigan taxes.  The old Michigan Business Tax (a complicated scheme applying to all businesses) was repealed.  In it’s place is a new corporations-0nly 6% profits tax. The new tax collects only a small fraction of the revenue the old tax did, so individual tax burdens have been increased, particularly on seniors and low-income folks.  In summary, it is a giant tax shift: lower taxes for businesses and higher taxes for individuals, especially the poor and seniors.

Why?  Jobs, we’re told. The Governor, a self-proclaimed very smart person (“nerd”), keeps telling people that Michigan needs new jobs and the way to create them is to cut business taxes.  Even before the new tax cuts were officially passed, the evidence is starting to come in that the idea doesn’t work, as shown here.  But the governor continues to claim jobs will result if we only cut business taxes.  I’m skeptical, but willing to listen.  After all, he’s a really smart person (his campaign ads keep telling us that, so it must be true, right?)  So I was very excited this morning as I’m driving to work  and listening to Michigan Public Radio  (recording of program as MP3 available here) to hear the Governor would be on the show live.  Maybe he could enlighten me about how this “tax cuts create jobs” stuff works.

The very first question was fantastic.  An alert listener asked (I’m paraphrasing from memory): “Precisely what empirical evidence exists that your business tax cuts will create additional jobs and just how many jobs should we expect?”  Snyder couldn’t give a straight answer.  He immediately responded with “It’s just a matter of basic economics. When a business have more money or resources it can create more jobs” (again paraphrase).

Unfortunately for the people of Michigan, Snyder has it all wrong.  That’s not basic economics.  He’s thinking basic accounting.  Basic economics says businesses will hire more workers when they perceive there’s demand (spending) for their product at profitable prices.  Taxes don’t really enter into it.  That’s not just basic economics theory, it’s also confirmed by repeated surveys of business managers.  Tax rates, particularly state tax rates, are waaaaay down the list of factors important in deciding on hiring and staffing levels.  Snyder should know better.  He himself, when he was CEO of Gateway Computers, moved the company from South Dakota, a low tax state, to California, a very high tax state?  Why would he have done that if taxes were so important?

The moderator, Rick Pluta, to his credit, didn’t bail out Snyder but moving quickly to the next question.  Instead we were treated to the Governor claiming that “it’s not possible to pinpoint exactly how many or which jobs might be created by the tax cuts, but we believe it will happen”.  That’s my point here. There is no evidence. There is no sound theory.  Instead, what we have is a faith-based policy.  We cut taxes for businesses in total and eliminated them completely for thousands of businesses in belief  that jobs will be created.  There’s no real evidence.  There’s just a belief in the magic jobs genie*.  The jobs genie only comes out when taxes are cut.  And when taxes are cut, the genie just magically appears and inspires businesses to go crazy and say “Hey let’s hire people. Let’s create jobs!”

Snyder then proceeded to offer his only empirical evidence. “We have some surveys where many of these small and medium businesses say they would consider creating new jobs in response to this bill”.  The Governor’s a lousy social scientist and economist.  Contrary to Snyder’s claims, it is possible to study and quantify this stuff.  Applied economists have done this stuff for decades. It’s our bread-and-butter.  There are  many studies on the jobs impact of state business tax cuts.  The evidence does not support Snyder’s position.  Indeed, contrary to his claims that they don’t know how many jobs will be created, the state treasurer and budget office must necessarily make estimates of state employment under different tax schemes in order to make budget forecasts.  Snyder is hiding because the evidence doesn’t support what he wants to claim.  He prefers to conjure magic beings like the jobs genie.

Snyder did say that employment is how he should be measured as governor.  What he didn’t say is that the appropriate measure is how much Michigan’s employment grows relative to the national average.  If the U.S. as a whole simply manages to not have a major recession while he’s in office, then Michigan employment will grow.  The U.S. economy as a whole is the dominant influence on Michigan employment, not what the state government does.  But, the policies of the state government have a major influence on whether the state does better or worse than national average.  For the last approx. 15 months, Michigan has performed significantly better than the national norm, albeit Michigan started in the worst condition.  (Nevada has that title now).  The clock is ticking now.  It’s up to Snyder to prove that, contrary to historical evidence and his own prior business decisions, that state business tax cuts will create faster than national average job growth.

* The magic Jobs Genie is only one of a pantheon of magical creatures that animate the economic theories of many politicians these days.  There’s also the Banking Unicorn and the Investment Confidence Fairy and others.  I’ll talk about those in future posts.

Home Foreclosures – Write Your Attorney General

I support this from Yves Smith at Naked Capitalism.  The law must be upheld. Fraud is fraud. It is not “paperwork glitches” or “snafus” or “correctable errors”.  It has been the policy of the banks and mortgage servicing organizations to file en mass false statements and false documents in our courts.  These practices will not stop unless the senior executives are held accountable for the actions of the organizations they lead.

“Crime Shouldn’t Pay”: Tell the State AGs You Want Mortgage Fraud Prosecuted

Tomorrow, a group of homeowners is meeting with Iowa’s attorney general Tom Miller, who is leading the 50-state effort which is investigating foreclosure and mortgage lending abuses.

This group is presenting a letter to Miller asking them to prosecute bank executives for mortgage fraud and wants to show broad-based support for this idea via having concerned citizens sign it.

Here is the text of their letter:

Dear Attorneys General,

We, the undersigned thank you for investigating fraudulent and illegal foreclosure practices by the nation’s biggest banks.

Your investigation is the best hope for homeowners and communities since this crisis began. Americans are watching. Our expectations are high that we will see justice for the millions of families who have lost their homes, the millions more who are at risk of foreclosure, and the neighborhoods across the country devastated by falling housing values and vacant properties as a result of widespread mortgage fraud.

The bank executives who committed fraud should be prosecuted. Any settlement needs to go beyond fixing paperwork, fully addressing ongoing abuse and ending the flood of unnecessary foreclosures.

We demand that any overarching settlement agreement contain mandatory loan modification programs, including principal reduction for owner-occupant families facing foreclosure and remedies for those families who have already lost their homes.

Now is the time for bold leadership from the nation’s Attorney Generals to hold big banks accountable for the damage they have done to families, communities and the nation’s economy.

I have signed this letter and strongly encourage you to do so. Please visit the site, www.crimeshouldntpay.com to support this effort. Thanks

The GM Tale

Earlier this week General Motors, the new post-bankruptcy GM, issued it’s Initial Public Offering.  Initial signs are very encouraging in several ways, which I’ll describe.  But first let’s take  a note.  Only 20 months, less than two years, The conservatives and tea party types were howling for GM to go bankrupt and for the government to not step in – just let it and Chrysler die along with what would probably have been nearly a million good U.S. jobs and the State of Michigan. Let’s revisit those events for a moment below the fold:

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