Corporate Governance Reform—Women Make A Difference

ANSWERING THE KENNEDYS CALL

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NYTimes.com

California State Senator Hannah-Beth Jackson’s upcoming Senate Bill SB826 on reforming corporate governance will make corporations more responsive to the needs of the societies in which they operate by requiring more women to serve on their boards.

This is heady stuff, as research has shown that women on a corporate board are more likely to “create a sustainable future” by, among other things, instituting strong governance structures with a high level of transparency.

A 2012 UC Berkeley Hass School of Business study entitled, Women Create a Sustainable Future, to list just a few of the benefits of adding more women to corporate boards, are more likely to be:

· Companies that proactively invest in renewable power generation and related services.

· Companies that proactively address the environmental risks embedded in their financing decisions.

· Companies that provide strong employment benefits and performance incentives and offer employee engagement and professional development programs.

· Companies that offer products with an improved nutritional or healthier profile and have sought credible verification for its healthier status.

“Women and sustainability are two sides of the same coin …. Corporations build better societies if they have balanced boards,” said Halla Tomadottir, executive chair and co-founder of Audur Capital in Iceland, interviewed in the study. Ms. Tomadottir was on the all-female board of the only Icelandic bank that didn’t go into bankruptcy in 2008 during the Great Recession.

Perhaps her most famous quote, made in the Michael Moore documentary, Where to Invade Next? was “One woman on a board is a token, two women a minority. It takes three women to make a difference.” (sic)

“Take for example, a company like Nestlé,” says the Hass study, “which has recently turned its focus toward creating shared value with its product offerings in three areas: nutrition, water, and rural development. Nestlé uses science-based solutions to improve the quality of life through food and diet. “This type of social initiative is well aligned with corporate sustainability for Nestlé. Our research findings to date suggest that having more women corporate directors is correlated with these types of strategies and outcomes. Nestlé’s Board of Directors has three women.”

Senator Jackson’s bill, “no later than the close of the 2019 calendar year, would require a domestic general corporation or foreign corporation that is a publicly held corporation, as defined, whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California to have a minimum of one female, as defined, on its board of directors, as specified. No later than the close of the 2021 calendar year, the bill would increase that required minimum number to 2 female directors if the corporation has 5 directors or to 3 female directors if the corporation has 6 or more directors.”

The behavior of corporations and corporate boards has come under scrutiny particularly since the December 2017 massive corporate tax cuts that its supporters touted would repatriate some of the $3 trillion in overseas assets, as well as raise the incomes of its employees.

But that hasn’t happened to date, as the focus of corporations’ increased profits since then have been to return the windfall to investors and corporate CEOs—either by buying back more shares, going private, or indulging in Wall Street’s merger and acquisitions’ game, rather than creating sustainable programs that would profit society at large as well as themselves.

In a 1970 Times magazine article, the free market economist Milton Friedman argued that businesses’ sole purpose is to generate profit for shareholders. Moreover, he maintained, companies that did adopt “responsible” attitudes would be faced with more binding constraints than companies that did not, rendering them less competitive.

“There is one and only one social responsibility of business — to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” -Milton Friedman, New York Times Magazine, September 1970.

How the world has changed since then! We now know that ignoring environmental and social issues can be bad for business. Companies that pollute their local communities risk poisoning their customers. Ignoring the state of the local school system can mean depleting the pool of qualified workers. Exploiting workers risks higher turnover and training costs, not to mention greater difficultly in attracting the most qualified candidates.

As part of its findings, SB826 provides some impressive supportive data about the benefits of board gender diversity, including the following:

“(1) A 2017 study by MSCI found that United States’ companies that began the five-year period from 2011 to 2016 with three or more female directors reported earnings per share that were 45 percent higher than those companies with no female directors at the beginning of the period.

(2) In 2014, Credit Suisse found that companies with at least one woman on the board had an average return on equity (ROE) of 12.2 percent, compared to 10.1 percent for companies with no female directors. Additionally, the price-to-book value of these firms was greater for those with women on their boards: 2.4 times the value in comparison to 1.8 times the value for zero-women boards.

(3) Credit Suisse conducted a six-year global research study from 2006 to 2012, with more than 2,000 companies worldwide, showing that women on boards improve business performance for key metrics, including stock performance. For companies with a market capitalization of more than $10 billion, those with women directors on boards outperformed shares of comparable businesses with all-male boards by 26 percent.”

The business world can no longer afford to ignore what it takes to create a sustainable future, a future in which our children can enjoy the fruits of our labor. How can we otherwise enjoy a world growing more populous with limited resources and a warming planet?

Harlan Green © 2018

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Homeowners Preserve Rising Home Equity

The Mortgage Corner

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Graph: MarketWatch/Black Knight

American homeowners have amassed a record $6 trillion in equity in their properties, according to a study by real estate data firm Black Knight, a figure boosted by surging home prices and a trend of owners staying put longer. But rising interest rates and caution resulting from the housing troubles of a decade ago are limiting how much of that equity is getting tapped.

“As the second quarter came to a close, the total amount of tappable equity available to homeowners with mortgages surpassed the $6 trillion mark for the first time in history,” said Ben Graboske, executive vice president of Black Knight’s Data & Analytics division. “There is now $636 billion more tappable equity available than at the start of 2018, and nearly three times as much compared to the bottom of the market in 2012.”

Homeowners are staying in their homes longer in part because of fears of another housing bust that was part of the Great Recession, in other words. In 2016 and 2017 sellers had stayed in their homes a median 10 years, up from a median of six years all the way back to 1985. This is also because there are fewer homes to buy as housing inventories have shrunk drastically.

Inventory of starter and tradeup homes were down 12-13 percent compared to a year ago, one of the biggest drops in years, Trulia chief economist Ralph McLaughlin said. McLaughlin is hoping that rising home prices will entice more owners to sell, even though mortgage rates have risen from their low of 3.5 percent to 4.25 percent for a 30-year fixed conforming loan with a 1 point origination fee. But that is still historically low, when fixed mortgage rates were in the 6 percent range just a few years ago, and even as high as 16 percent in the mid-1980s.

Existing-home sales are still strong, however, according to the National Association of Realtors. Total existing-home sales, https://www.nar.realtor/existing-home-sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, did not change from July and remained at a seasonally adjusted rate of 5.34 million in August. Sales are now down 1.5 percent from a year ago (5.42 million in August 2017).  

Lawrence Yun, NAR chief economist, says the decline in existing home sales appears to have hit a plateau with robust regional sales. “Strong gains in the Northeast and a moderate uptick in the Midwest helped to balance out any losses in the South and West, halting months of downward momentum,” he said. “With inventory stabilizing and modestly rising, buyers appear ready to step back into the market.”

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Graph: Calculated Risk

Higher interest rates aren’t stopping new homes from being built, either. August Housing starts jumped 9.2 percent to a 1.282 million annualized rate which is well above July’s upwardly revised 1.174 million rate, according to the U.S. Census Bureau. But permits, which are the forward looking component of the report, fell 5.7 percent to a 1.229 million rate.

Looking at starts, multi-family construction that has slowed 29 percent to a 406,000 rate for year-on-year growth, which had been in the negative column, was up 38 percent. Single-family homes, which are the more important of the readings, rose 1.9 percent to an 876,000 rate that, however, is fractionally lower than a year ago, down 0.2 percent.

Where do interest rates go from here? The Conference Board has predicted economic growth could average 3 percent or higher for the rest of this year, which will continue to boost interest rates somewhat. Their leading economic index rose 0.4 percent in August following even stronger gains in the prior two months, the Conference Board said Thursday. The LEI is a gauge of 10 economic indicators meant to signal peaks and valleys in the business cycle and the broader economy.

But our take is there just isn’t enough consumer demand to push rates much higher. Consumers have been paying down their overall debt as a percentage of household income, as well as borrowing less. It is corporations that loaded up on easy money the past several years and now have to worry about paying it back if there is a downturn.

Harlan Green © 2018

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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What Do Slowing Retail Sales Mean?

Popular Economics Weekly

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Graph: Econoday

Retail sales are slowing this fall, yet consumers’ confidence is at an all-time high. Why are consumers buying less and saving more this season? It could be higher interest rates, as the Fed has raised short term rates 5 times, already, so that the Prime rate that determines credit card debt is now 5 percent when it was 4.25 percent one year ago.

Or, they see this recovery from the Greatest Recession since the Great Depression as not that impressive. August retail sales barely managed a 0.1 percent monthly gain as tracked in the blue column of Econoday’s graph. Retail sales are only about 1/3 of total consumer spending which are mostly services. Nevertheless, August’s results are pointing to slowing for total consumer spending as tracked in the green bars and which will be posted at month end, when third-quarter GDP numbers are first released.

Wages are rising mostly for just the top one percent of income earners, according to Thomas Piketty, who should win the Nobel Prize in economics this year for his research on the real and growing income disparities in western countries. The U.S. is at the bottom of developed countries, because other developed countries offer far more in benefits; such as universal health care, paid maternity leave, and higher minimum wages that offset the income disparities.

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His best-seller, Capital in the Twenty-First Century, published in 2014, raised the curtain on the rising wealth of the one percent since 1980 due to their ownership of capital, the means of production, as described by Nobelist Paul Krugman in the New York Review of Books.

“Capital still matters; at the very highest reaches of society, income from capital still exceeds income from wages, salaries, and bonuses. Piketty estimates that the increased inequality of capital income accounts for about a third of the overall rise in US inequality. But wage income at the top has also surged. Real wages for most US workers have increased little if at all since the early 1970s, but wages for the top one percent of earners have risen 165 percent, and wages for the top 0.1 percent have risen 362 percent.”

Then why are consumers so optimistic? The University of Michigan sentiment survey rose to 100.8 from 96.2 in July for the strongest showing since March this year, as well as since 2004. It has to be the ‘goldilocks’ growth consumers and employers are experiencing at present.

Economic growth is neither too hot nor too cold, as I said last week. Both retail CPI and wholesale PPI inflation indexes have been falling (i.e., prices not too hot), while it has become easier to find jobs with higher salaries (i.e., job market not too cold).

It does look like American consumers feel we are in a sweet spot, even though costs are now rising due to the new tariffs. Maybe it’s one last fling before the inevitable downturn, when interest rates continue to rise and consumers can buy no more. But who knows when that will happen?

Harlan Green © 2018

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Does Lower Inflation Mean a Goldilocks Economy?

Popular Economics Weekly

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Graph: Calculated Risk

Consumers are being helped by consumer prices that are barely rising. The Consumer Price Index is up just 2.7 percent, and core CPI without food and energy prices up 2.2 percent in 12 months. This has kept interest rates at historic lows since the Great Recession and is the reason for an economy that is neither too hot nor too cold.

Just how long it will last is an enduring question for economists. One infallible feature of an incoming recession is sharply rising interest rates. But historically low interest rates over an extended period can also mean most consumers aren’t earning enough to boost their buying power, which in turn ‘powers’ higher prices and inflation—a sign of intractable income inequality.

The Great Recession was largely caused by Alan Greenspan’s Fed raising interest rates 16 consecutive times—a total of 4 percent—that caused all the ‘liar’ loans with negative amortization and no real income or asset verification to become unaffordable to lower-income borrowers and homeowners.

That isn’t the case today—yet. The wealthiest 10 percent—what is basically left of the middle class that has profited since the Great Recession—has a very high savings rate. But not the ‘other’ 90 percent, so that average annual incomes are rising at 2.7 percent; also the consumer inflation rate today.

Households carried a record $13.3 trillion in debt at the end of June, Federal Reserve records show. That tops the prior peak of $12.7 trillion in 2008 during the middle of the Great Recession. High debt levels, especially in mortgages, contributed to the 2008 financial panic and the severity of the recession, as I said.

But low interest rates and inflation are keeping delinquencies very low at the moment, and lending standards remain quite stringent in the post-crisis era, according to a recent Moody’s study reported by MarketWatch. As such, there’s less danger of another housing market collapse.

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But that is the catch. Interest rates and inflation must remain very low for delinquencies to remain ‘very low’, and that won’t last much longer with wage pressures growing, fewer workers available for hire, and the Federal Reserve saying it will continue to raise short-term rates.

Business confidence is soaring as well, thanks to the economic ‘porridge’ being neither too hot nor too cold. The NFIB Small Business Optimism Index soared to 108.8 in August, a new record in the survey’s 45-year history, topping the July 1983 high-water mark of 108. The record-breaking figure is driven by small business owners executing on the plans they’ve put in place due to dramatic changes in the nation’s economic policy.

And small businesses create most of the jobs. “Today’s groundbreaking numbers are demonstrative of what I’m hearing every day from small business owners – that business is booming. As the tax and regulatory landscape changed, so did small business expectations and plans,” said NFIB President and CEO Juanita D. Duggan. “We’re now seeing the tangible results of those plans as small businesses report historically high, some record breaking, levels of increased sales, investment, earnings, and hiring.”

So how long can such goldilocks growth last? It is the ideal condition economic planners work for, but lasts only very briefly until debt levels rise to unsustainable levels, given the inherent fluctuations and dynamism in any economy. Vigilance in looking for signs of higher interest rates and slower growth is therefore a major requirement to stay ahead of those fluctuations.

Harlan Green © 2018

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The Red Tide in Education

ANSWERING THE KENNEDYS CALL

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The Guardian

Red tide algal blooms have been threatening coastal beaches for decades, killing sea life and sickening bathers; a sign of rising ocean temperatures due to global warming as well as human pollution.

But another red tide is benefitting Americans by threatening the wealth of oligarchs like the Koch Brothers and U.S. Education Secretary Betsy DeVos, who have diverted funds so desperately needed by America’s public schools where most of our children are educated to not only preserve their wealth, but increase it.

It is the red state Teacher’s movement for better salaries and benefits in public schools in the conservative red states that have either cut education spending in public schools, or diverted funds to Charter Schools and private school vouchers that have benefited the largely conservative wealth-holders of this world and their supporters who own and operate for-profit schools that can receive up to 90 percent of their revenues from federal taxpayers, typically in the form of student loans and Pell Grants.

The Teacher’s movement is another example of powerful ‘grass-roots’ movements generated in local communities to solve grievances that have worsened their citizens’ quality of life.

A 2016 report by the NYU Brennan Center for Justice entitled Secret Spending in the States stated in its introduction: “Six years after Citizens United enabled unfettered spending in our elections, the use of so-called dark money has become disturbingly common. Contrary to the Supreme Court’s assumption that this unlimited spending would be transparent to voters, at the federal level powerful groups have since 2010 poured hundreds of millions of dollars into influencing elections while obscuring the sources of their funding.”

In the six states the Brennan Center report detailed—Alaska, California, Arizona, Colorado, Massachusetts and Maine—1) At these levels, dark money sources often harbor a narrow, direct economic interest in the contest’s outcome;  money sources often harbor a narrow, direct economic interest in the contest’s outcome; (2) relatedly, contentious ballot measures that carry major economic consequences frequently attract dark money; and (3) in the relatively low-cost elections at these levels, it is easy for dark money to dominate with unaccountable messages that voters cannot meaningfully evaluate.

Who were the recipients of this largesse in PAC money that ballooned after Citizens United? It has to be no secret that the supporters of vouchers and/or Charter schools that favored higher-income constituencies won out in the funding struggle.

This is what started the “Red for Ed” teachers’ movement fighting for better school funding who had suffered for years, in underpaid and underfunded public schools. “Red shirts and blouses had emerged as the official uniform of teacher uprisings against low pay that were spreading from West Virginia to Oklahoma and Kentucky under the rallying cry “Red for Ed,” said an excellent NYTimes Magazine article, about the Arizona teachers’ uprising.

Public education is a $650 billion national enterprise,” said the NYTimes, “comparable to the U.S. defense budget, except that the federal government pays only 8.5 percent of the cost. States and local school districts split the rest in varying proportions, but each state finances it differently. Texas and Louisiana tap plentiful oil and gas revenues; Northeastern states like Massachusetts and New Jersey rely on high income and property taxes.”

Arizona hasn’t raised income taxes in more than 25 years, and counts more on sales taxes and other revenues generated by a growing economy. However they pay for it, K-12 schooling is the biggest single expenditure for all states, accounting for 36 percent of general-fund budgets on average.

“A half-dozen Arizona teachers — and more than 25 others, current and retired, with education backgrounds — declared their candidacy for the State House and Senate with a promise to increase funding for public schools, said the NYTimes. “They’re part of a sudden wave of educators on ballots as first-time candidates in every walkout state.”

The ultimate solution has to be political action, especially political action by women who make up 80 percent of the teaching profession. In fact, the red wave is turning into a blue wave, as this has energized even the less liberal voter base. Data from the Center for American Women and Politics at Rutgers University shows that more women have filed to run for Congress than at any point since at least 1992 — and by a wide margin. That year, 298 women ran for the House of Representatives. This year, 476 have — most of them Democrats.

Harlan Green © 2018

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What To do About America’s Homeless Problem?

ANSWERING THE KENNEDYS CALL

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Los Angeles Times

A study released in December 2017 by the U.S. Department of Housing and Urban Development (HUD) reported America’s homeless population has risen this year for the first time since the Great Recession, propelled by the housing crisis afflicting the west coast, according to a new federal study.

The study has found that 553,742 people were homeless on a single night this year, a 0.7 percent increase over last year. It suggests that despite a booming economy, the poorest Americans are still struggling to meet their most basic needs.

Most affected are the western states of California, Oregon and Washington, where soaring housing prices have made even rental housing expensive and out of range for many low-income citizens that live and work in their largest cities.

The state of California estimates that 180,000 new housing units are needed each year in order to keep up with population growth. Over the last decade, however, there was an annual average of less than 80,000 units, because developers often face a long review process and local opposition.

Government investment in low-income homes has lagged since it was slashed during the Reagan administration, and today most people on the cusp of homelessness do not receive government rental assistance. In fact, the government spends twice as much on a housing tax break for the wealthiest Americans, and the tax reforms just enacted by Congress could deal a further blow to affordable-housing.

Localities are left to improvise solutions. Los Angelenos voted to tax themselves to provide billions in funding. Tiny-home villages have taken root in Oregon and Washington state (though a plan to erect them in Silicon Valley was met recently by angry residents chanting “build a wall” to keep homeless residents out). Hawaii is pursuing the idea of authorized tent encampments, according to The Guardian.

“The improved economy is a good thing, but it does put pressure on the rental market, which does put pressure on the poorest Angelenos,” said Peter Lynn, head of the Los Angeles homelessness agency, in an LA Times interview. The most dramatic spike in the nation was in his region, where a record 55,000 people were counted. “Clearly we have an outsize effect on the national homelessness picture.”

LA Mayor Eric Garcetti has pushed through a record budget to build and house homeless denizens of Los Angeles. A recently passed Measure H initiative is generating $355 million each year to provide a wide range of services to help people in desperate need. Proposition HHH is giving the City $1.2 billion to build thousands units of supportive housing over the next decade — units that will be paired with those same services, so that unsheltered Angelenos can go home for good.

Because it will take years to build permanent housing, Mayor Garcetti has launched a new plan called A Bridge Home — to give homeless Angelenos in every neighborhood a refuge in the community they already know and love by housing them in “trailers, tents, and other temporary shelters across the city,” until they can be connected with a permanent home.

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It’s one remarkable solution to the homeless crisis that a major city like Los Angeles can afford. The mayor, who has set a goal of ending street homelessness by 2028, has said at least 6,000 people a year could be served by the shelters, which are planned for each of the city’s 15 council districts. New state funds may boost available funds, but the mayor’s budget set aside $1.3 million for each of the 15 shelters.

We are saying, in other words, that part of the solution to the housing and homeless crisis has to be the responsibility of governments. The private housing industry is booming for the most fortunate, but local, state and the federal governments must acknowledge that homelessness should be the concern of all Americans.

Harlan Green © 2018

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August Jobs Report No Big Deal

Popular Economics Weekly

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Graph: MarketWatch

Total nonfarm payroll employment increased by 201,000 in August, and the unemployment rate was unchanged at 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, health care, wholesale trade, transportation and warehousing, and mining.

Very little happened with the August Unemployment report. Average hourly wages rose slightly, and more service sector jobs were created, but fewer new jobs were in the more highly-skilled manufacturing and high tech sectors.

White-collar professional firms filled 53,000 positions, bringing the total created over the past 12 months to more than half a million, which includes both the professional and business services, and health care. These are the fastest growing jobs in the country. Health-care providers hired 33,000 people, transport firms added 20,000 jobs and construction companies hired 23,000 workers.

Employment fell by 3,000 in manufacturing, the first decline in 13 months. U.S. tariffs and a scarcity of (higher paid) skilled laborers may finally being felt by employers. And gains for July and June were revised down by a combined 50,000, the Labor Department said Friday.

This could be a sign that economic activity is peaking, although wholesale trade, transportation and warehousing job growth was robust.

The (other) Household Survey that actually measures the unemployment rate—a smaller telephone survey of households that is slightly less accurate—held steady at 3.9 percent though the labor participation rate slipped 2 tenths to 62.7 percent.

This was because the number of people in the labor force went down by a half of million, to 161.8 million from 162.3 million reflecting a decrease in the number of employed which in this survey, in contrast to the BLS Establishment survey, includes the self-employed.

The big news was the 2.9 percent rise in average hourly earnings, the highest since December 2007 and the beginning of the Great Recession, according to Econoday.

The Labor Department also reported the number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers), at 4.4 million, changed little over the month but down by 830,000 over the year. “These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs,” said Labor.

The fall in part-time employment tells us why wages are finally rising above the inflation rate—most have found full-time work. This may cause the inflation rate to rise, since workers’ salaries are about two-thirds of product costs. Inflation is still tame, however, with the Fed’s preferred ‘core’ PCE inflation index holding at 2 percent. We believe the Fed will raise short term interest rates by another 1/8 percent at its next FOMC meeting, anyway, in spite of President Trump’s tendency to berate Fed Governors to hold interest rates down; because higher interest rates make imported goods more expensive for consumers.

In other words, inflation is only this low because of the slow rise in hourly wages. It means a majority of new jobs being created are either in those warehousing and transportation sectors, or leisure services that still pay barely subsistence wages.

There was nothing else of note in the August jobs report. Consumers seem to be happy, with consumer confidence and retail spending at their highest levels in years, which should mean continued high GDP growth for the rest of this year.

That’s because neither consumers nor investors seem to be taking rising import and export prices very seriously, yet.

Harlan Green © 2018

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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