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Commentary :: Social Welfare
Right to Rent and Social State as Prosperity Motor
04 Sep 2012
The Scandinavian countries show that more social equality can be combined with more education and economic growth and less unemployment and poverty. Humanity is rich when wealth is shared.

A plan to prevent homelessness without cost to taxpayers and even benefiting bankers in the long-term was presented to the US Congress

By Peter Muhlbauer

[This article published 2/3/2012 in the German-English cyber journal Telepolis is translated from the German on the Internet. Houses are often in good condition right after their dispossession.]

According to the current census [1], more than 18 million houses in the US are empty. At the same time approximately three-and-a-half million people are homeless [2]. Theoretically there are five houses for every homeless person.

One should remember that this calculation is very theoretical because many homeless work and the person seeking a home in Silicon Valley is not helped by a house in Detroit while many house-seekers would probably be glad if they had legal title to a rundown place in the rust belt. In the past, they could have remained in one of these houses and not be put on the street by banks (whose mortgages they often could not pay on account of the economic crisis caused by the financial industry and the resulting unemployment).

Against this effect, Dean Baker [3] from the Center for Economic and Policy Research [CEPR (4)] designed a plan [5] in 2007 that even convinced conservative economists like Andrew Samwick [6] from Dartmouth College. Former homeowners would receive the option from the bank after their expropriation of continuing to live there and paying an appropriate rent set by an independent expert.

This would prevent unemployment on a large scale and ensure that the houses retain their value and not be seized by criminal banks and vandals and sold for drug money in the search for pipes and cables. In this way, whole streets and parts of town could be saved from falling into nearly complete worthlessness. A fatal chain reaction of falling real estate prices, exodus, destruction and further loss in value would be ended because the property in the neighborhood would remain desirable through the continued occupation of a rescued house.

This "right to rent" plan would not cost the taxpayer one cent and would be relatively simple to carry out, as Baker emphasized five years ago. No new bureaucratic offices need to be created since a mere change of the legal situation would be enough. This change of the legal situation must be carried out by politicians. In the past, the plan ran aground here. Politicians preferred election tactics to the well-being of citizens and could not agree on the project already worked out by Baker and Samwick that only needed their approval to keep many Americans from homelessness and stop the transformation of more and more regions into gangland.


Is a change of economic paradigms on the horizon?

By Peter Muhlbauer

[This article published 1/2/2012 in the Germany-English cyber journal Telepolis is translated from the German on the Internet,]

In the 1980s the economist Alfred Rappaport [1] provoked a change of paradigms with his theory of shareholder value. He argued that increasing the profit for shareholders should be the primary goal of a firm. To reach this goal, businesses should give their managers financial incentives in the form of stock options.

These principles are put in question more and more. The former General Electric CEO Jack Welch [2] long regarded as a model student of the shareholder value religion attained his announced goals in the 1980s and 1990s and then did a complete reversal. On March 12, 2009 he told the Financial Times [3] the concept was "the dumbest idea in the world."

Roger Martin [4], the dean of the Rotman School of Management [5] at the University of Toronto [6], gives a detailed theoretical substantiation to this statement in his book "Fixing the Game" [7]. His criticism of shareholder value is based on the fact that a firm rises or falls (more or less automatically) under the rule of stock prices when earlier announced goals are reached or missed, not with business success. The size of the bonus is tied to reaching these goals more than to business success.

The economist illustrates the absurdity of this situation by analogizing the system with sports. If one analogizes what happened and will happen in the economy, football teams would only play for the most exact fulfillment of their bet, not for victory. Conflicts of interest while on the agenda for business managers lead to sports players being suspended.

In economic life according to Martin, shareholder value ideology promotes dishonesty. In his opinion, it was not a wonder that masses of bookkeeping manipulation scandals occurred with the triumph of the idea of shareholder value. Considerable incentives are given managers who straighten out numbers. In the long-term, this damages the acceptance of capitalism in the population and undermines the roots of the system.

In the medium term according to Martin, the shareholders suffer for whom the system was actually invented, not only the consumers and the general public. Like a test phase continuing for over a quarter of a century, shareholder value had the opposite of the intended effect. According to Martin's calculations, the output of businesses declined since the change of paradigms. From 1933 to the 1970s, the average annual profit of firms in the S & P 500-stock index was 7.5 percent. Then it fell to 6.5 percent.

Manager earnings exploded. Between 1960 and 1980, CEO earnings fell 33 percent in the 365 largest US corporations listed on the stock exchange. In this time period, managers gained more for their shareholders - at a more favorable price. In contrast, CEO pay doubled between 1980 and 1990 and increased fourfold between 1990 and 2000.

Because managers earn so handsomely, it is illusory to expect that they would change the system in a way disadvantageous to their employers according to Martin. Admonishing words to these managers would be a great waste of time. As Upton Sinclair formulated in 1935, "It is hard to bring a person to understand something if his salary depends on not understanding." [7]

Therefore Martin urged legal changes like repeal of the Private Securities Litigation Reform Act [8] passed in 1995 (devised by Newt Gingrich) that protects managers and businesses from responsibility [9] and the accounting rule FASB 142 [10] so depreciations would no longer be coupled to stock prices. This would remove disadvantages for managers who do not orient themselves in shareholder value. As additional measures, Martin recommended regulation of hedge funds promoting volatility risks and a waiting period of several years. Managers would be ordered to buy their own shares.

A stronger concentration of businesses on their products imagined by Harvard graduates as a replacement for the models of the last decades was cautiously conceived and led to the word "middle class" entering the English language. For this concept to be successful, technicians would have to be given more power and separated from bureaucrats. That would be a far more radical change of paradigms than the farewell to shareholder value.

Martin, Roger L.: Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL. Harvard Business Review Press 2011.
Sinclair, Upton: I, Candidate for Governor: And How I Got Licked[1]. University of California Press 1935 [1994], S. 109.


By Armin Pfahl-Traughber

[This book review of Andreas Oppacher, "Deutschland und das Skandinavische Model. Der Sozialstaat als Wohlstandsmotor," Koln 2010 published 5/11/2010 is translated from the German on the Internet, http://hpd/node/9488.]

(hpd) In his book the economist Andreas Oppacher compares the social and economic development in Germany with the developments in Denmark, Finland and Sweden. With the help of statistical material, he makes very clear that a relatively equal income distribution in an active social state can accompany a high living standard and stable economic growth.

People hardly remember today Ludwig Erhard's well-known maxim "Prosperity for Everyone." The idea that a more equal distribution of income, goods and prosperity is possible is even regarded as idealistic and unrealistic. However a glance at the high North shows that "prosperity for many" is not a utopia. "Prosperity for many" can be reality. The Scandinavian countries demonstrate that more social equality can be combined with more education and economic growth and less unemployment and poverty. In his book "Germany and the Scandinavian Model," the graduate in business administration Andreas Oppacher emphasizes this in a comparative perspective. He grapples with the question "how a permanent prosperity can be achieved in Germany" (p.7). The comparison with Denmark, Finland and Sweden helps the author, a "convinced supporter of a solidarity market economy."

Firstly, the economic and social development in Germany with its supply-oriented fixation led to wage-losses, mass unemployment, social cuts and growth slumps. A neglect of the demand side occurred because of ignorance about an overall economic perspective. An increasingly unequal income distribution and falling real wages caused a negative effect on domestic consumption and mass purchasing power. On the other hand, the Scandinavian countries with a high living standard took another path with a relatively even income distribution. The general unemployment rate and the number of long-term unemployed are lower; the general employment rate like the rate for women is higher. For Oppacher, an active social state is a prosperity motor for increasing employment and growth and not only desirable for ethical or social reasons.

In conclusion, "the Scandinavian model among present economic- and social systems is far and away best suited to approach the ideal of "prosperity for everyone." A more equal income distribution as exists in northern countries would lead to a permanent strengthening of domestic demand and help solve Germany's most serious economic problem. In Scandinavian countries, social ethics and the value of the person seem to be different. The dominant mentality there traditionally rated the common interest highly. A much more positive relation of citizens to their state and politics follows" (p.102). From these findings, Oppacher derives recommendations for Germany: taxation according to output, reform of social security, strengthening the commons and improving the education system.

The comparison with Scandinavian countries makes clear: globalization and economic development are not practical necessities that society and politics must accept without alternative. Another orientation of economic and social development occurs in concrete reality. These are not utopian dreams. Oppacher stresses that a more even income distribution can accompany more economic growth. The author presents facts from official statistics as convincing evidence that show what can be learned from a comparative analysis. Can lessons from Scandinavia be applied in the German situation? Oppacher emphasized the differences in political culture. His view to the North deserves great attention in the German discussion.





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