Allison Schrager joins Brian Anderson to discuss the problems with “stakeholder capitalism,” the latest legislative proposals from Washington, and the danger of a government-managed, risk-averse U.S. economy.
Audio Transcript
Brian Anderson: Welcome back to the 10 Blocks podcast. This is Brian Anderson, the editor of City Journal. Joining me on the show today is a guest who we featured before on this show, Alison Schrager. She's a senior fellow at the Manhattan Institute, and a contributing editor of City Journal. She's an economist with very wide ranging interests, the author of An Economist Walks into a Brothel, a book about understanding risk in everyday life for scholarly research, focuses on public finance, tax policy, labor markets, and monetary policy. And she's been writing up a storm for City Journal lately, covering such topics as shareholder primacy, which is the theme of her forthcoming essay in our spring issue, the latest legislative proposals on the economy from Washington, and the COVID-19 pandemic and its economic consequences. Allison, thanks very much for joining us.
Allison Schrager: Thanks for having me.
Brian Anderson: So let's start with that forthcoming essay, which is on shareholder primacy. This is a subject fundamental to the way we think about the structures of the economy. And it's a debate about whether shareholders or stakeholders should be the agent in the economy. That goes back to decades, to 1970, when Milton Friedman, the famous economist, wrote a landmark essay that the primary social responsibility of business is to simply increase profits. Now, lately in particular, that doctrine has been coming under ferocious attack, with many arguing that corporations should be pushing the interests of stakeholders. And stakeholders could include customers, employees, suppliers, local communities. And the push is coming not just from activists, but now from business figures, with the business round table actually recommending that companies embrace stakeholder capitalism in a statement made a couple of years ago. So maybe just to set the terms of the discussion, what exactly is this idea of stakeholder capitalism, and how are businesses supposed to further the interests of stakeholders?
Allison Schrager: Well, you actually sort of described it quite well, which is with shareholder primacy, the corporation's obligations are to shareholders, which is effectively to increase profits, because that increases the share price or dividends, because that is what shareholders care about. With the stakeholder model, it's not just shareholders, there are other stakeholders involved, it could be employees, it could be members of the community. What community means is unclear. It could be people in your community. It could be people of the entire world, the entire country. But as you can see, as I said, it becomes much more muddy who these stakeholders are. It also becomes more muddy to how much weight do they get in these decisions. If you just have shareholders, it's pretty clear, but when you have multiple stakeholders, and sometimes their interests are at odds with each other, it's not quite clear how you balance all these issues. And so obviously, accountability also gets muddy.
Brian Anderson: Well, this suggests that the act of defining who a stakeholder is, is almost unavoidably political, right? Because you have the president, Joe Biden, I think defining stakeholders as including all of society. So, differentiating among these stakeholders then becomes an act of politics.
Allison Schrager: Exactly. Is it when you asked me to write this, I think it was like last summer. It wasn't so much in the news, but now we're seeing sort of what the costs of that are. Because as I said, sometimes stakeholders have different objectives that are at odds with each other. And so ultimately, who the stakeholders are and how much their needs should be given weight is ultimately always going to be a political exercise, because it really just comes down to values. And we live in times that where values have never been more politicized. And I think we're just definitely seeing this lately with major league baseball, all these corporations in Georgia, of who really are they accountable to. And you were also seeing their are business costs for it. You alienate some people, not only your customer base, but also maybe some of your employees.
Brian Anderson: And couldn't there be negative economic effects from this? I assume companies that failed to deliver value for their shareholders could then just resort to saying, "Well, we're benefiting our stakeholders."
Allison Schrager: Yeah, exactly. I think Friedman's best say, it's come under a fire, late lakes delight. Even sort of champions of it are saying, "Well, maybe it made sense in that in the '70s, but it doesn't make sense now." And I think the opposite, I think it's never been more relevant, because we live in such a politicized environment now that it sort of helps the boards not to be focused on profit, which does allow them not to be, push their companies to be the best they can be, the most innovative they can be. One of the arguments against shareholder value is that it's made companies less focused on innovation. Although I'm not quite sure why bringing more stakeholders into the party would make them more focused on innovation, considering innovation is expensive, it's risky and tends to be very long-term oriented, and also often displaces labor.
Brian Anderson: So why are so many businesses now embracing this idea of stakeholder capitalism? Is it because they see it as a way to sidestep their obligations to shareholders, that would be the cynical explanation, or is it really a question that corporate leaders are moving to the left, that the leaders of these companies actually agree with the notion of stakeholder capitalism?
Allison Schrager: I tend to be more charitable. I don't think it's cynical. They just don't want to be accountable. I think their lives are easier when they are accountable. I think it is to say, you can't go against the mob now. There are costs to offending people, but it was certainly people who want businesses to take on these moral stances. But how can a CEO now say, "You know what? We only care about profits." That would strike many as heartless. You could get a Twitter mob after you. You could have boycotts. It's definitely lower risk just to say, "Oh yeah, yeah. We care about everyone."
Brian Anderson: Right. And the social media factor is significant, I would say, the organizing of these kinds of Twitter campaigns against companies that don't meet the appropriate political standards. I guess, as a business leader, you've got to start thinking about those things.
Allison Schrager: Yeah. If you're a business leader, especially in a large corporation, you're a very politically savvy person by definition. And I think they read the room that you can't afford just to sort of keep your head down and do your job. I remember, I think it was in the '90s, Michael Jordan said, "Republicans buy sneakers too, so I'm not going to alienate them." It's hard to imagine an NBA player making a statement like that now.
Brian Anderson: Yeah. True enough. But it is a significant problem I think longterm, both-
Allison Schrager: Yeah. So Friedman's argument was that shareholder primacy benefited both the firms economically and it benefited society. And I think in this hyper political environment, that's actually even more true, because it's not healthy for our society. It is better for firms to be focused on profits. Not only does it necessarily alienate their customer base and even in their employees, but work is one of the few situations where people of different political affiliations come together and have to cooperate, especially these days. So once corporations become more political, they're going to hire more politically homogenous people. We lose those interactions, which are also very valuable and important for society.
Brian Anderson: Well, let's turn to another theme of your recent work for us, which is Washington, what's going on with the Biden administration and with Congress, where there's been a slate of new legislative proposals on the economy. These include the $2 trillion American Jobs Plan, as well as steep proposed tax increases for corporate income and capital gains. So let's look at some of this more closely. What about the taxes? The capital gains hike would return, I think, the top marginal rate to certainly levels unseen since the '70s, while the proposed rate for corporations, I think is 28%. That would make the U.S. tax regime really one of the more punishing ones in the world, right? In the developed world for businesses. So wouldn't these kinds of reforms make the United States a less attractive place to do business?
Allison Schrager: For sure. It's still a very arcane tax system, so I think really, we're losing efficiency more than we're going to gain revenue from these proposals. It's like even when the corporate tax rate was 37%. the tax base is a different issue, which is how you can dodge those taxes. So I'm sure we'll just see more ways of getting around taxes, which you said is just bad for everyone. You lose efficiency. I think the message is particularly harmful, right? I feel like what is the common thread in all these policies, be it the Infrastructure Bill, which is not all infrastructure, corporate taxes and raising capital gains taxes is shifting innovation from the private sector and into the public sector. We want the public sector to be the primary innovator to decide which industries are going to grow, and to make a risky investment in the private sector is unappealing as possible. And I think that psychological shift is actually even more worrying than these actual tax policies, which just really introduce a lot of more inefficiencies back into our tax system.
Brian Anderson: Well, this is one of the criticisms you've made about the proposed Infrastructure Bill, right? That it would begin to reshape the U.S. economy from one driven by private innovation to one where the government is picking and choosing the projects to allocate capital to. Is this really a kind of industrial policy that some of our friends, including on the right, have been advocating?
Allison Schrager: Yeah, pretty much. And industrial policy, I used to think of it as a dirty word, but now everyone seems to think that's code for something wonderful. The problem is the track record of industrial policy is terrible. I think people are looking at countries like China and thinking, "Oh wow. They had great industrial policy. They are growing like crazy. They're not having the downturns we are." Of course, these come at great costs, not only to human rights, so that's not inevitable, but also in terms of economic freedom. And also, I think one of the reasons the private sector is better at... You said leaving innovation, the private sector is always better. So innovation is really how we grow and prosper as a society. And actually, ironically, it is also how we become more environmentally friendly, because innovation is about using resources more efficiently.
The fact is we don't have a great track record with the public sector being the primary innovator. Public sector is very good at sort of taking a market proven technology that is clearly we already have a need for, and then sort of ramping that up. But actually picking winners for what that's to be the next great technology, they don't have a great track record of that. And that's why most industrial policies sort of turned out to be wasteful. They divert capital from its most productive uses, and it turns out not really ending well.
Brian Anderson: Now back in March, you wrote a essay for us, a piece for us suggesting that public health authorities had failed in communicating the level of risk that COVID-19 pose to ordinary citizens. This is [inaudible 00:12:20]. Question of risk is a major theme of a lot of your work. Now too often, the leaders of the country gave, in your argument, inconsistent or even dishonest advice rather than telling people the truth. And now the CDC will reportedly loosen mass guidance for people who've already been vaccinated, which is good news. Some public health leaders have admitted that they should encourage people to get the vaccine rather than scold them into compliance. These seem to me to be pretty welcome development. But is this too little, really too late for an agency that some folks tuned out really early on in the pandemic?
Allison Schrager: Yeah. Credibility is important. So there's this widespread conventional wisdom, or I guess just conventional wisdom, that humans are terrible risk takers. We can't make any sense of risk and uncertainty. We certainly can't even make sense of risk when the risks we take pose harm to others. But that's largely a myth. Actually, people are very good at taking risks. We are built to live with risk. And actually, as humans, we've been dealing with deadly pandemics for many thousands of years. But the evidence does show people are lousy risk takers when they get inconsistent and confusing information that they can't fully trust. If you present risks to people in coherent ways that makes sense to them and is intuitive to their natural understanding of risk, people actually make very fairly good decisions. And I think we sort of have had this idea of nudging people to better decisions and maybe not being fully honest and sort of manipulating people into making better choices. And I think we're seeing that just did failed spectacularly this past year, because no one really knows what's going on.
I'm even seeing social media or certainly on the streets of New York City pushback from the idea that we're going to stop wearing masks on the street. Why we were ever wearing masks on the street is unclear. Even Anthony Fauci said better, "Well, it's really hard to get it outdoors in a fleeting encounter if you're not near anyone," which walking down the sidewalk in New York tends to be. But I can't blame for people for being so confused and so risk averse while other people are just sort of not wearing masks at all, even in very high risk situations, because the messages we've gotten on things like masking or things like vaccine have been so confusing. I think I just saw that the CDC is now saying pregnant women shouldn't get the vaccine, after pushing us for weeks that we should. As I said, it's so confusing, and no wonder people can't make smart risk choices, is because they're not getting clear, consistent information in any way.
Brian Anderson: You had written an essay last year, a very interesting essay for us on different attitudes about risk in different parts of the country. I wonder if you've thought any more about that against the backdrop of the pandemic. Certainly different states have reacted differently to the question of risk.
Allison Schrager: Yeah. I think, as I said of watching it play out, it just became more and more true or that argument became more clear to me. As I said, we just do see different levels of risk tolerances in different parts of the country. I'm told that other than coastal cities, no one's been wearing masks outdoors, or people are more comfortable with going to doing indoor dining. And to some degree to said, it does suggest different risk tolerances, but we see this not with the pandemic behavior and other ways. To some degree, a larger welfare state reflects less risk tolerance, and we see some states sort of wanting less risk. And it's ironic because I think the perception has always been that more red states are more risk averse. Conservatives suggest taking less risk, or being less open to social change.
But other ways you see conservative states being much more open to risk. And sort of one of my so vague predictions, which last year, I hadn't really thought through as much, but is now seeming a lot more clear, is that one result of the pandemic is we might see a risk reshift. And I think this is one of the beauties of federalism. You see some states that allow individuals to take more risks, have less of a safety net. And if you want to opt into that, you can move to those states. And I think we're starting to see not huge, but some sort of risk migration based on preferences.
Brian Anderson: Very interesting. Thanks very much, Alison. Don't forget to check out Alison Schrager's work on the City Journal website, www.city-journal.org. We'll link to her author page in the description. You can also find City Journal on Twitter @CityJournal, and on Instagram @cityjournal_mi. And as always, if you like what you've heard on the podcast, please give us a nice ratings on iTunes. Again, Alison, thanks very much. Always great to have you on the show.
Allison Schrager: Oh, thanks so much for having me. Always a pleasure.
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