Capitalists, Arise!: Q. & A. With Peter Georgescu

PETER GEORGESCU, 12 AUG. 2015, The New York Times

In a Sunday Review article last weekend, “Capitalists, Arise!,” Peter Georgescu, the chairman emeritus of Young & Rubicam, argued that if we don’t deal with income inequality, we’ll face intolerable taxes or social unrest. Readers rose up, posting more than a thousand comments on Facebook and The Times’s site challenging and applauding his ideas. Here, Mr. Georgescu addresses a few of their comments.

Globalization

Q. Nice to see someone with some ideas other than “let them eat cake”. I would like to add to your list (1. increased compensation, 2. business invest in productivity and innovation) that business should stop sending the work to Asia. — KO, First Coast

A. Very grateful for the question. Globalization and technology create the proverbial two-edged sword. Focusing on globalization first, we need open markets for our products and services. Now free enterprise is great as a concept but hardly ever is it totally free: Subtle (or not) local protectionist policies or human-rights issues (often appropriate) add complexity. For the last couple of decades, the scale of low wages mattered to the overall cost of production and thus global competitiveness. As technology advances, low wages are becoming less critical in the overall price of goods produced. As a result, we are seeing manufacturing coming back to our shores. This trend is likely to increase. So, in this case, technology is a friend. Your suggestion that companies invest much more in R&D and innovation (presumably, rather than stock buybacks and excessive dividends) is vital to our future competitiveness. Technology takes away traditional jobs, but can create new opportunities, new ways to manufacture or create new or improved products.

So the other critical piece to the puzzle is education. Here I mean more than just four-year college degrees. We also need to teach and train for specific existing and new skills. Trade schools for the young and retraining those who lose jobs is key. Private industry with help from local or state and federal governments will be a vital initiative to both keep us competitive and create the new jobs critical for economic growth and well-being.

Tax incentives

Q. Instead of giving tax incentives to business so they can in turn give them to their low-paid workers, how about we just give the money directly to the low-paid workers? What benefit to society does adding a middleman (the employers) give us? — Gabe

A. Gabe, you raise an important issue:Why not have government give money directly to people and bypass helping businesses pay higher wages? My personal preference for higher wages is twofold.

First, I feel strongly that most of us benefit from working for a living. It’s more than just about money. It can bring meaning, dignity and satisfaction to our lives. We feel better earning our daily bread than having it just gifted to us. Long-term, both workers and businesses will benefit greatly by better treated, better paid and better motivated employees.

Second, it is morally right. Employees are vital corporate stakeholders with rights. Shareholders also have rights, but they do not have a legitimate right to short-term maximization. Shareholders are not the owners of a corporation in a legal sense or a moral sense. In a legal sense, the corporation owns its own assets (that is the preponderance of legal opinion) Employees are the vital value creators. They deserve fair pay for the value they help produce. And studies have proved again and again that better motivated employees produce better returns to all stakeholders over time: the shareholder, the employees, the corporation itself.

Q. Why is there an unwillingness by your class to pay more in taxes? I know why there is an unwillingness to pay more in taxes by my class, and I fight that whenever I can. But we need a massive tax increase in this country. In North Jersey alone, we can use $10 billion for tunnels, roads, and rail. Not to mention more money for school employees. — Mike Flynn

Q. While I applaud Mr. Georgescu’s desire to do something about income inequality, if he can describe a tax of 80% on incomes of $500,000 or higher as “oppressive,” he does not truly understand that it is income inequality itself that is oppressive, not higher taxation on the highest incomes. As long as the 1% consider progressive taxation to be a form of oppression, there is no hope: they will continue to think of themselves as uniquely deserving of their vast wealth and see themselves as victims rather than as the oppressors — which they in fact are. — William Carter

A. Mike Flynn and William Carter: There are a bunch of reasons people don’t want to pay more taxes. Some are more legitimate than others.

First, people are concerned because government is too big, wasteful and inefficient. Sadly, there is a lot of truth to this. But government can become smart, frugal and accountable. Programs must be evaluated, fixed or killed. Measurement and accountability should be the hallmark of all government spending. We, the rich and the less rich, must demand it.

Second, people want to pay only the taxes owed. Period. Well, the problem is a broken tax code. It must be fixed to be simple, transparent and fair for all. (All those tax loopholes, broomed.)

Third, many wealthy people use their wealth wisely. Private philanthropy in this country helps us get the finest academic medical centers, best schools and universities, art of all varieties. Close to $250 billion in private philanthropy annually help make this nation be a more civilized place.

Finally, wealth creation should be an incentive to build businesses, to add jobs. Overtaxing does, at some point, deter investments and job creation.

We must demand of government greater accountability, measurement and efficiency. In that light, increasing taxes when necessary is wise. But balanced budgets are also wise. Paying interest on debt is expensive and wasteful.

That said, if people felt our tax dollars were well spent, and the reasons for more taxes were clear and worthy — people would feel a lot better about higher taxes.

Government involvement

Q. Why does this need government action? Why don’t corporate executives act on their own? Why not bring outlandish executive salaries into line with the salaries of line workers? Why not start the ball rolling? Or are these silly questions? Lucy Starr Norman Charles

A. What is not so obvious or transparent is the extraordinary pressure on businesses to maximize short-term shareholder value. The destructive words are “short-term” and “maximization.” Our business culture and practice is oppressive and punitive: Deliver or you’re fired. The current system of C.E.O. tenure (four years) reflects this climate. In fact, the C.E.O. can be seen to have been bought with outrageous compensation to deliver those short-term results. On top of that, a group of unscrupulous activists, well financed stalk companies buy them out — drain cash, fire people and flip the wounded remains. (Some activist shareholders are, of course, very useful to businesses because they aim to build value for the long term.) In this threatening environment some CEOs seem to find it hard to take on unilateral action. The government program is available to all businesses that apply and qualify and is intended to get short-term action.

With this, a background. I am simply trying to give businesses some air cover to demonstrate that paying employees, including executives, more works. That investing more money in R&D to foster innovation works. Shareholders will see that, over time, they are likely to do as well or even better. (See Jagdish Sheth and others’ book, “Firms of Endearment.”)

The point is simple. Let’s break the current logjam. Let’s be practical. To keep doing the same thing while expecting different results is not just insanity — it’s simply not practical.

By paying people more, everyone wins: the people, their families, the economy — because of growth in consumption, and the government, through higher taxes (and in some cases, lower entitlements).

Q. Two ideas here, one is a question:

1. Not sure why all of a sudden the government has to get involved to incentivize higher wages. That kind of flies in the face of the case you made that wealthy businesses have to do this or face the consequences. I understand it is a good business strategy to get something if you can, but I would say no to that (if I was the government). Sounds like NOT doing it is a bad business decision.

2. Why not find ways to help the lower/middle make it up the ladder? Set up angel investment funds, or just invest in opportunities for entrepreneurs to realize their own dreams and ambitions (kind of like the “hand up” you might have gotten when you first started out). Those kinds of trusts to provide tax shelters and even opportunities for some return on investment. — Laura Madden

A. Helping individuals and businesses get started is a great idea. This can be an opportunity for wealthy investors, businesses and governments. It can be done, and has already been proven to work. At our best, our financial system does that. But today, tragically, banks are not in the business of loaning money to small businesses. It is more profitable for them to make money on trading or dealing in derivatives or the like. That should change.

Your idea deserves serious consideration from governments (local and federal) to provide creative tax incentives to build new business. The obvious rewards are compelling. A great suggestion.

Student loans/college debt

Q. Part of Mr. Georgescu’s opportunities happened because of the outstanding education he received. What will be done to address the lack of opportunity for affordable, quality education, and the massive amounts of student loan debt most of us now owe? A trillion dollars in student loan debt should be added as part of the problem. Today, Mr. Georgescu’s education would leave most of us with well over $100,000 in student loan debt. — Kari Hall

A. The good news here is that the problem is well recognized. As always, we have been moving too slowly to fix it.

Clearly the cost of education is out of control. Before long we will see a revolutionary development in meaningful online education. The online quality will improve and provide both the engagement and networking now available in traditional schools at a very modest cost.

I must also call out the poor quality of current education. Our kids rank in the lowest quartile among developed nations on basic skills and competencies. We generally know how to fix our problems. We have plenty of workable solutions tested that are also scalable. Now we need the will to break through the barriers and complexities and provide the needed resources.

Frankly, we must make sure that quality education from the age of 3 is available to all children, without the burden of crippling debt.

Schools must reform to deliver better education at lower costs, online education to provide equal or superior results must emerge, and some form of debt forgiveness must be provided to the folks currently in debt. Superior education to all, including new trade schools, are essential for our national security, for our economic growth and well-being.

Small businesses

Q. It’s great to exhort large corporations like Starbucks and Walmart to pay their low wage employees more. But what about the thousands of small and mid sized businesses that employ many more people? They may not have the resources to raise minimum wages and develop employees. What would you suggest for them? — Ian Macgregor

A. Can small businesses pay people well? Absolutely. Let’s separate start-ups from ongoing businesses. A start-up requires transmitting an idea into a practical, viable ongoing concern. A viable business must be able to cover its capital debt and, of equal importance, pay people at minimum wage, or better. If you can’t do that, in some reasonable time, you shouldn’t be in business. Go fix your business model or go search for a better, more viable idea.

The 2016 election

Q. Which — if any — US presidential candidate do you see as most likely (or at all likely) to put actual effort (instead of just lip service) into fighting inequality through redistributive measures? — Julia Veble Mikić

A. I believe 2016 is a turning point election year. For too long now we have not addressed adequately the key issues facing our nation. The list is long.

Inequality is at the top. It’s not income equality we should seek. It’s equality of opportunity that becomes imperative. Equality of opportunity is what has made America strong, what has kept our democracy alive. That’s the definition of the American dream. Without that we see our middle class vanishing and both social and economic inequality accelerating. Our education, immigration, the environment, energy economic growth and jobs, our tax code. All issues which must be addressed with solutions to be implemented.

I am for the candidate who has the vision, skills and competence to address these issues. I want, I demand specifics. I will seek practical, viable solutions. That’s who will be my candidate. I want a person of integrity, competence and compassion. I want a person who wants to serve, not to be served. That’s who will be my candidate and get my vote.

I am convinced that person will emerge.

Is capitalism under threat?

Q. First off, I’d just like to congratulate Mr. Georgescu on a brave and wise article.

A quick prelude is that I fear that our capitalist model is in danger. In the early days of capitalism (here in the US and elsewhere) companies were mostly family owned and run even for generations. Now we have the board, stockholders and CEO model, which appears very flawed. The stockholders often are just looking for short term gain, the board has no real ties to or ‘skin’ in the company, and the CEO is often colluding with the stockholders for short term gain.

After that long-winded lead in, do you share those fears? Any thoughts on improving the current public corporate model? How about the German system of requiring public corporations to have a union representative on the board? BruceS

A. I fear for the future of capitalism in our country and around the world. Capitalism really means free enterprise. The name came from the resource that once drove the free-market engine. Capital no longer plays that prominent role. Creativity and innovation drive global business today. Capital is just one resource, important, but no longer the major differentiator. Historically, this so-called capitalist free-enterprise engine achieved extraordinary results. It propelled America into the superpower that is it today. It lifted hundreds of millions of people from deep poverty to a more humane standard of living. (Think China, India, Brazil, countries in Africa and more.)

But that extraordinary engine has been hijacked by a rogue philosophy that says that shareholders’ interests come first and which threatens to destroy both this magnificent engine and our very way of life. The misguided philosophy says that one of a corporation’s stakeholders, the shareholders, deserves to have their value maximized in the short term. The three other vital stakeholders are not adequately represented at the decision-making table and inadequately compensated. First, the employees — who are the real value creators. They have been turned into a cost to be squeezed. Then, the corporation itself, where investment in R&D and innovation is grossly inadequate. Finally, a business’s customers, who should be a corporation’s prime stakeholder — not the shareholders.

Even the moral justification that the shareholder is the owner and an owner gets what they want when they want it is a myth. In fact the shareholder is a mentor at best. They come into stock when they want and leave at their will. And they are of course immune from any corporation liabilities. That’s not ownership. The preponderance of legal opinion is clear. The corporation owns its own assets, not the shareholder.

So yes, we must rebalance a business’s incremental value returns among the key stakeholders — the employees, the shareholders and the corporation itself. And we must always put the customer’s interests first.

If we do that, we can liberate free enterprise from its present-day shackles.