A Good Boss Can Boost Team Productivity
A study of two multibillion-dollar retail chains homes in on managers.
A Good Boss Can Boost Team ProductivityJosh Stunkel
(light piano music)
Hal Weitzman: The deal to avert the fiscal cliff delayed rather than resolved some of the thorniest challenges facing the US economy. But with divisive partisanship the order of the day in Washington, can US lawmakers formulate and pass policies to tackle government spending and deficits and to fuel economic growth?
Welcome to The Big Question, a new monthly video series from Capital Ideas at Chicago Booth.
I’m Hal Weitzman and for Part I of our launch edition, I’m joined by an A-list panel.
Randall Kroszner is the Norman R. Bobins Professor of Economics at Chicago Booth. He was a governor of the Federal Reserve system from 2006 to 2009 and a member of President George W. Bush’s Council of Economic Advisors from 2001 to 2003.
Austan Goolsbee is the Robert P. Gwinn Professor of Economics at Chicago Booth. He was formerly the chairman of the Council of Economic Advisors and a member of President Barack Obama’s cabinet.
Steven Kaplan is the Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance at Chicago Booth. He has testified before committees of both the US Senate and the House of Representatives and serves on the boards of several companies.
And David Axelrod is institute director at the University of Chicago’s new Institute of Politics. He’s one of President Barack Obama’s top campaign strategists and was formerly senior White House advisor to the president.
Panel, welcome to The Big Question.
David Axelrod, let me start with you. We avoided plunging over the fiscal cliff narrowly, but now looking forward, we have the debates coming up over the debt ceiling. We’ve got the debate over the sequester, the continuing resolution. Do you think 2013 is going to be a year in which the US lurches from political crisis to political crisis.
David Axelrod: Well, I hope not. I think what we have to confront are some structural problems in our politics. The first instinct of politicians is survival. And while the national impulse is to solve these problems through cooperation, in many of these congressional districts, particularly on the Republican side, that’s not the case. They’re only responsive to primaries because that’s the only political challenge they face. And there, there’s a different impulse, which is basically to try and make government as small as possible and to resist compromise.
And so we have to see whether or not the leadership of the Republican party wants to become a national party and solve problems, or a regional party and simply keep reelecting members mostly from southern districts.
Hal Weitzman: Does that mean that the partisanship could well get worse this year?
David Axelrod: Well, it could get worse, though my hope is that there are enough cool heads in the Republican party who will say, this is not helping us. I mean, understand that Congress now is trading about as low as any Congress ever has in the history of polling and they barely have anywhere to go.
Steven Kaplan: They’re at 13 percent, I think.
David Axelrod: Or lower, it’s been as low as 10. I always joke that if you include the margin of error, they’re close to being liked by no one in America.
(all laughing)
So they have to take this into account. And so I think there’s going to be a struggle within the Republican party. And I think one of the big fault lines is going to be the debt ceiling and whether or not there are those in that party who are willing to drive the country over that much larger cliff, as devastating as that would be.
Hal Weitzman: Randall Kroszner, let’s take a step back for a moment and think about the deficit. What would it actually take to eliminate the deficit?
Randall Kroszner: It would take an awful lot of action by the Congress and the administration. I mean, I think what we really need to do is think very carefully about the costs and benefits of different types of spending.
I think there’s really sort of a false debate about austerity versus stimulus. I think there are a lot of things that the government is wasting money on, but there are a lot of things that might be very sensible for the government to be making investments in.
Part of the stimulus package had that very important high-speed rail-train plan between Duluth and Minneapolis. I’m not quite sure that’s where the key bottleneck is, but there are other infrastructure projects, like the Tappan Zee Bridge, which is the bridge that’s just above New York City, that’s falling apart and is a major bottleneck.
So thinking carefully about the expenditures and thinking carefully about how you raise revenue. You want to think of it in terms of, again, costs and benefits. There are more efficient ways to raise revenues and there are less efficient ways to raise revenues.
And the type of approach that was in the bipartisan Simpson-Bowles approach, which was, say, either keep rates the same or lower rates and broaden the base, a much more efficient way to do that, eliminate a lot of the distortions that come in the tax system, a lot of the loopholes, and we could have a pro-growth tax system, because that’s really the key thing that’s ultimately going to get us to have the right balance. And a careful root-and-branch analysis of the expenditure, what’s good and what isn’t, and just focus on things that really have benefits.
Steven Kaplan: So I want to put some numbers on this. The economy is a $16 trillion economy. The CBO has forecasts of deficits through really 2020, 2022 of about $1 trillion a year.
So that is somewhere between 4 and 6 percent of the economy as the economy grows. So you’ve got $1 trillion basically each year to make up. And that’s where you’re gonna have to find money.
Now, AGI of everybody, that’s the adjusted gross income, is about $9 trillion. So if you were going to get that entire trillion dollars out of taxes, you could raise rates another 11 percent on everybody.
If you wanted to just hit the top 1 percent, you’re talking about $2 trillion of money. If you want to erase the $1 trillion deficit with just the top 1 percent, you have to raise their rates by 50 percent, which obviously you can’t do.
So the challenge is: you have this $1 trillion basically hole, you’ve got to fill it, and you’re gonna fill it with some combination of revenue increases and spending cuts. And it’s really got to be the entitlements, which are a big chunk of that structural deficit. And that’s gonna be the challenge. Simpson-Bowles I think had a roughly $1 spending cut, $1 revenue increase. And that’s where we are.
Hal Weitzman: Austan Goolsbee.
Austan Goolsbee: I mean, if they did it that way, that’s almost exactly the ratios, even perhaps more spending cuts relative to revenues of what the president proposed. So if we got together a group of people that were as sensible as Randy and Steve and David and—
(drowned out by laughter)
Hal Weitzman: (laughing) Isn’t this bipartisanship?
Austan Goolsbee: I think that is what you would do, and it would be fine. The only thing is we have as of the last debt ceiling, as of coming into this debt ceiling, there is a group of people in Congress who aren’t in what I would consider that kind of sensible place where you say, well, you need some of this, and you need some of this, and we’ll put it together.
Historically, Washington’s pretty good at solving problems of that form, where the correct answer is you get some of what you want, you get some of what you want, we’ll make a deal. Washington tends to be less able to solve problems where it’s a contest of two or three worldviews, and you’ve got to decide which one is right and only do the ones that satisfy that.
And unfortunately, you’ve seen a transformation, it feels like to me, of the budget from a compromise, everybody gets part of what they want, into a no, it’s a contest of worldviews. And either we’re going to wholesale change the nature of entitlements so it’s not going to be a public social-insurance program. We’re going to try to convert it to a privately financed, privately run, private accounts type of circumstance.
Steven Kaplan: But it’s not exactly an insurance program at this point, but go on.
Austan Goolsbee: Well, it is a social-insurance program of the form that social-insurance programs take. The level of the promises exceed what the level of the revenues are going to be because the population is aging. And we gotta deal with that. I think Steve’s right. It’s going to be some combination of revenues and cuts. But there is a group of people saying it can’t be any revenues at all. And the more they insist on that, the more it’s just—
David Axelrod: As I was listening to these guys speak, I was struck exactly by what you said. And I was thinking, yeah, but you guys have tenure. These guys don’t. And that’s a big difference.
(Steven Kaplan laughing)
And it is going to take quite a bit of force to resist some of the more strident voices in both parties in order to forge this kind of compromise.
Hal Weitzman: I mean, you’re suggesting it’s a question of leadership. But the leadership has to sell it to the rank-and-file members of the Congress.
Austan Goolsbee, given that dynamic, what would a feasible deal look like?
Austan Goolsbee: I would say two things about that. I think ultimately a feasible deal will look a lot like Simpson-Bowles, which is to say a somewhat balanced, comprehensive type of plan that tries to stabilize the debt-to-GDP ratio, start it shrinking.
And to do that, you need about $4 trillion of deficit reduction over 10 years. And there’ll be some argument over, well, how much revenue will come from, how much of the revenue will come from high-income people, how much of the cuts will be on social security, on Medicare, etc.
But if you take a step back, few people make fun of the dysfunction in Washington more frequently than I do. But I will at least give them one way in which it’s not entirely their fault. It’s our fault, the voters. And that is we, the American people, have not made up our minds how we want to do this. And you got big majorities saying they think government is out of control. They want spending cuts. And you got big majorities saying they don’t consider entitlements to be spending and they don’t want anyone touching it. And as long as we, the voters, are sending the signal we don’t want any taxes to go up but we don’t want anything to be cut, of course they can’t agree in Washington. I think that’s the root of why they haven’t been able to agree so far.
Hal Weitzman: Randall Kroszner, does that mean ultimately Americans have to accept that taxes on the middle class are going to go up?
Randall Kroszner: Well, exactly as Austan said, it depends on how we do it. And so there can be very significant reductions in some of the spending categories. We obviously need to have some very fundamental entitlement reforms. When you look over the longer horizon, that’s really the major challenges in the budget. Health care, social security, those kinds of things.
Hal Weitzman: But just cutting spending, is that going to be enough? Don’t you have to raise revenues as well?
Randall Kroszner: Well, it depends how much and how. I mean, if you look over the longer term, the big items, the ones that are really coming in precisely as was said, we’ve got an aging population. So more and more promises have been made. And as the population has gotten older, even if you had the same promises, you’d have a lot more burdens. But more promises have been made when there’s a larger constituency that are older people.
Some of those, unfortunately, some of those promises will not be able to be made good on. And so thinking about ways to deal with that, whether it’s raising retirement ages . . . When the social-security system was put in the late 1930s, people didn’t live nearly as long as they live now. Thank God they live longer, but you have to take into account the fiscal realities of that. Very few people actually collected social security. Now almost everyone collects social security.
Hal Weitzman: David Axelrod, do you think that Americans could get used to the idea that some of those long-term promises will not be met?
David Axelrod: Well, I think that as Austan said, I think that you can sell Americans on a balanced plan in which there is some sacrifice, particularly if it’s in the long term. What you can’t sell them on is a wholesale abandonment of the fundamental principles of some of these insurance programs.
But one thing that I think is important to point out, the short answer to the question that you asked, Randy, is yes, you can’t do this without revenue. And in fact, we hear so much about Simpson-Bowles, and Republicans love to talk about Simpson-Bowles in Washington, but the fact is that Simpson-Bowles called for far more revenue than the president has proposed himself. You can’t solve this problem without revenue. So there’s gonna have to be changes on both sides of the ledger.
I think the other thing that is important to consider as we have this discussion is what’s happened in our economy. The fact of the matter is that changes in our economy have put enormous pressure on middle-class families and people aspiring to become middle-class families. There’s been great polarization in terms of wealth. And this has been going on for a long time. And these forces have created a great sense of anxiety among a lot of folks in this country.
So then when you approach them and say, and by the way, now we’re gonna cut your Medicare, we’re going to gut your social security, it’s a difficult case to make. I think it can be made if it’s done responsibly. The chained CPI proposal is one that I think the president has advanced. I think it has potential to be a salable—
Hal Weitzman: What was that, tell us what that proposal was?
Austan Goolsbee: To change the indexing of social security to what a lot of economists think of as a more accurate measure of the actual cost of living. It would have the feature that it would slowly cut benefits relative to what they would otherwise be, but it would do so over time and kind of gradually.
Steven Kaplan: Does it take out wages?
Austan Goolsbee: It doesn’t switch to wages. This is just changing the CPI.
Steven Kaplan: But it doesn’t take out the wage growth?
Austan Goolsbee: No, but it switches it to [inaudible].
David Axelrod: But the other element is on health care. There’s no doubt that we have to have savings in Medicare, savings in Medicaid. The question is how and whether or not, I mean, there are enormous inefficiencies in our health-care system, and everybody agrees on that. But the rationale behind the president’s health reform was to get at some of these. And we have to aggressively ask the question, how do we make these programs more efficient? How do we make our health-care system as a whole more efficient? Because that is the best way to ultimately reduce the cost of these programs.
Randall Kroszner: That’s exactly the right way to approach things. Because what we want to do is think about how public policy can make markets more efficient, make markets work better rather than make them more burdensome, make them more problematic.
Because to try to get at this and address those middle-class insecurities, we have to restore growth. And unfortunately, we haven’t had as much growth as we would like. And thinking about pro-growth policies, whether it’s the entrepreneurial side, on the tax side, and thinking about our expenditures, where they inhibit market development and where they can help market development. That’s where we really need to go.
Hal Weitzman: Talking of growth, Steve Kaplan, what effect does this uncertainty politically and of government spending having on companies and their investments?
Steven Kaplan: So my sense is, so I can give you an anecdotal take and then some research takes. So anecdotally, people were kind of frozen over the fourth quarter in many companies waiting to see what happened with the fiscal cliff. And in particular, trying to understand what would happen with taxes.
So the good news is the taxes are kind of done. And the bargaining power on changing taxes and raising them was in the hands of the president and the Democrats, and I think that is gone. I think the bargaining power has actually shifted to spending cuts and away from taxes. So I think that’s good for corporate decision-making. I think the debt ceiling discussion is less of an issue because we had that problem in 2011. We hit the debt ceiling and basically nothing happened. We got downgraded and interest rates went down.
Hal Weitzman: So that kind of uncertainty is already priced in.
Steven Kaplan: I think the good news from the economic perspective is No. 1, the consumer has deleveraged from where we were in the crisis. And that’s been going on for a while. Amir Sufi, one of our colleagues, has some nice research that showed we kind of turned the corner about a year ago.
So the consumer is actually relatively well-off, which is good. Corporate balance sheets are incredibly healthy. So this is something else that as CEOs get attacked all the time, they’ve done spectacularly well through this economy, the nonfinancial ones. The financial ones are a different story. But the nonfinancial companies have done spectacularly well. So that’s good. And real estate appears to have bottomed. Construction is coming back.
So we actually have a lot of good things in the economy now. And I’m kind of cautiously optimistic as a result of that for 2013.
Hal Weitzman: So 2013 could be the year when those big corporate cash piles could be put to use?
Steven Kaplan: Or they’ll be people . . . the big uncertainty, which I think was large and negative, I think a lot of that is gone or some of that is gone.
Hal Weitzman: But you talked about taxes. I mean, the tax code is still horribly complicated. Does the fact that we did a sort of small deal to raise taxes on the wealthy, does that now discount broader tax reform?
Davis Axelrod: No, I don’t think so. And I think that’s part of the prescription for a solution here is tax reform that yields more revenue. So to say we’re done with the discussion—
Steven Kaplan: Without raising rates. I think the rate discussion is . . . it’s gonna be hard to raise rates. I think you can broaden the base, which is what Randy was talking about.
Randall Kroszner: The key is pro-growth system. We have very high taxes on capital investment in the US relative to most of the other countries in the OECD. And we need to have the right incentives for entrepreneurship, for investment in the US. That doesn’t mean that we have to reduce revenues. We can raise revenues just much more efficiently. And I think that really should be the focus.
I think just thinking about more revenue, less revenue is not the right way to do it. Focus on the most effective way to do it and think about where do we get the most effective, where is the most effective use of the funds.
Hal Weitzman: I mean, the aim, Austan Goolsbee, should be to make the tax code simpler.
Austan Goolsbee: Yes, I agree with that, though remember how we got the system. We fundamentally have the highest corporate rate in the world, but we actually have very low taxes on investment. And that’s partly we, the economics profession, advised that that kind of system is a better way to tax companies than just having a low corporate rate that applies to everything. We said, you want to try to encourage investment, so keep the rate high and give these special investment deals, if you will.
Now we’re in some sense going around and arguing the opposite. Let’s broaden the base and lower the rate. And it may be that our previous advice was wrong. But we should bear in mind that we, the economists, advised something like the system that we got to.
I think if we do tax reform, one of the main goals should be to make it simpler and to try to discourage people from engaging in the kind of, whether it’s offshore activity or tax shelters or all kinds of things that the current complex code encourages.
Step back, though, to your previous question about uncertainty and growth. Remember, 90-plus percent of the growth in the economy has nothing to do with the government. It’s the private sector drives it and should be driving it. And we were just trying to set up a situation in which the private sector can go back to its normal role as the sustainable engine of expansion in the United States.
But it’s not only the United States where this kind of uncertainty is happening. I think the uncertainty is about the possibilities of financial crisis, the dangers of worldwide downturn. And so the accumulating money on the balance sheet without investing it is not just US companies. That’s a worldwide, advanced economies phenomenon. If you look in Europe, if you look in Japan, if you look in Australia and all around the world, companies are sitting on money because we’ve just gone through a phase where if you didn’t have liquid assets you died. And they don’t want to be in that position again.
Steven Kaplan: There’s one other uncertainty, which I don’t quite know how big it is, but I suspect it’s larger than people think, and that’s what’s going to happen when Obamacare kicks in at the end of the year. And particularly for the lower-income and middle-income people who work at retailers and restaurants, there’s a good chance there’s gonna be a lot of dislocation because of how the way the bill was written.
It increases costs to companies of $2,000 per person. And if somebody is making $30,000, $40,000, it’s a big cost to a retailer and to someone running a restaurant. And there is the potential for big dislocation there. And I don’t know whether the employees are feeling that yet. I certainly know the companies are thinking about it very hard. And that’s a wild card.
Hal Weitzman: David Axelrod, what do you make of that, that health care itself could be a source of uncertainty?
David Axelrod: Well, I’ve heard paeons to the market here. I know that the program that the president arrived at has at its core health-care exchanges in which competition is meant to lower the cost of health care and make it broadly available. And I think that’s ultimately going to be helpful to people across this country. I think the bill also addresses excesses in the market and it encourages efficiencies that are going to be helpful in the long run.
But obviously this is uncharted waters and we’re going to have to work our way through it. And the president’s always said we’re gonna have to make adjustments along the way, and we will.
Austan Goolsbee: And I would just say before concluding that in magnitude, this is a major driver of employment decisions in the US, it’s worth noting there are different industries who are affected differently by this employer mandate and different size firms.
Normally, economists if you wanted to figure out what’s the impact of X law on economic behavior, you’d compare above and below the threshold at which it applies, or industries where they don’t cover many people now versus ones where they cover most people already. So they ought to be more affected. If you do that kind of analysis, you don’t see much in the way of this being a primary driver of employment.
Hal Weitzman: Randall Kroszner, to come back to the US economy in general, in spite of all its problems, it actually seems that given the global picture, the US could be kind of a star in 2013. Europe is still in turmoil. Emerging markets have slowed down significantly. So actually the US looks relatively good.
Randall Kroszner: Relatively good is the important thing to say. I think there is a chance that we could have a reasonably strong recovery if we can deal with some of these uncertainties or some of these uncertainties aren’t quite as large as we say they are. If the Congress can at least to some extent deal with some of these fiscal issues.
I don’t think we’re going to get full resolution to sort of restructure the tax code in a true pro-growth fashion. It’s going to take a long time. And I don’t expect that in any Congress, particularly this Congress, to be able to get it done soon.
But Europe at best is going to be zero. China seems to be recovering from some shaky times this past summer reasonably well. As you said, the emerging markets, it’s a mixed bag there. So we have some potential.
Also something that is very valuable is all of the finding of energy that we’ve been having recently. And a lot of that is in natural gas, which is very difficult to send around the world. Normally, if you find more oil somewhere, that just reduces the world oil price, and so everybody benefits from that.
Here, effectively a lot of that natural gas has been caught in the US. And because of difficulties of building liquified natural gas plants to send that out, it’s keeping the natural gas prices and energy prices much lower in the US.
A number of heavy manufacturing things that had largely gone elsewhere are starting to come back. Chemicals and a lot of energy-intensive areas.
So we have some not only general strengths but something specific related to energy that could be really helpful relative to the country.
Steven Kaplan: If the EPA doesn’t get in the way.
(laughter)
Hal Weitzman: David Axelrod. Trying to balance protecting people’s lives and protecting our economy.
Steven Kaplan: The evidence is pretty good on fracking.
David Axelrod: But I started on a rather negative note. I think it’s important to note,
and this discussion reflects it, that (A) there are great strengths in the economy, and (B), I think the solutions to the particular fiscal challenge we have are not all that complex. I think it won’t take that much.
The President’s made some touch decisions. Congress has made some tough decisions in terms of cuts In the summer of 2011, they cut over a trillion over the next decade in discretionary spending. They just made this decision on revenues a step forward. And there are steps that everybody knows what the parameters of the solution are.
But what we have is really a political question. And that’s a source of frustration. Because rational people can look at this and say, you know what, it’s not that hard. We can solve this.
Hal Weitzman: Did the fiscal cliff deal at least show us that bipartisanship is still possible?
David Axelrod: Well, to some degree, yes, in that both sides compromised and were able to accomplish something.
But the question is at what price did it come, particularly within the Republican caucus? Is there a sense now that now it’s our turn? And we’re going to press this to the limit. And that would be an unhealthy impulse. I think both sides are going to have to compromise earnestly to get this done.
Hal Weitzman: But compromise is still possible?
David Axelrod: Compromise is possible, but it’s not valued.
Hal Weitzman: Well, I’m going to take the positive from that. Thank you then.
We’re out of time, but thank you very much to our panel: Randy Kroszner, Austan Goolsbee, Steven Kaplan, and David Axelrod.
For more research, analysis, and commentary, visit us online at chicagobooth.edu/capideas. And join us again next time for another The Big Question.
Goodbye.
(light piano music)
A study of two multibillion-dollar retail chains homes in on managers.
A Good Boss Can Boost Team ProductivityMonetary policy makers set the stage for inflation but were slow to respond when it appeared.
The Case for and against Central BankersRising rates have exposed landlords’ significant interest-rate risk.
Why South Korea’s Housing Market Is So VulnerableYour Privacy
We want to demonstrate our commitment to your privacy. Please review Chicago Booth's privacy notice, which provides information explaining how and why we collect particular information when you visit our website.