In a week-long series, prominent thinkers will look at ways to harness the private sector or extract more from a recalcitrant public sector in order to combat poverty and inequality. In the first post, Roosevelt Institute Fellow Georgia Levenson Keohane reminds us that while the government should be tackling these problems, there are practical and potentially exciting ways to get things done without it.

If there is any silver lining to the debt ceiling fiasco, it is that it has reshaped the contours of our national debate. No longer are we simply concerned with fiscal, economic or credit rating calamity; the crisis has gone existential.

Facts, it turns out, are stubborn and occasionally inconvenient. A budget deal that shreds the fabric of our social contract cannot ignore the following: that the recession has severely exacerbated poverty in the U.S.; child poverty remains shamefully high; inequality soldiers on; record and persistent unemployment -- either by official or more sobering measures -- has made life for millions of Americans scrambling to stay out of poverty cruelly hard and stressful. And all this before an unprecedented round of cuts to basic programs and services that comprise our safety net that will worsen, rather than improve, matters. The best route out of this mess, to say nothing of long-term prosperity, is jobs. Full stop.

On the question of employment, one does not need to be a student of history, Keynes, or a host of recent examples to face up to reality. Just take a look at the current British experiment in slash and burn austerity, the successes of the U.S. stimulus package (and in particular the tax credits, food stamps, unemployment insurance, and other social welfare provisions) that kept poverty from getting a whole lot worse, the basics of cost benefit (investments in things like early childhood education or healthcare for everyone, and for poor people especially, yield positive returns) or the basic levers of public policy (budgets have two sides, expenses and revenues). Job creation will require government spending. Full stop number two.

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When it comes to fighting poverty, it is critical that we continue to wage these ideological and political battles. Yet at the same time, we must also embrace a pragmatic approach to policy formulation that recognizes the harsh realities of austerity: government sorely lacks the resources -- cash and political will -- to meet the surge in human needs. In the coming days, a series of posts will address issues of poverty and equality of opportunity in exactly these terms, illustrating important 'social innovations' that allow us to do more with less. Broadly speaking, we will hear about two kinds of approaches: initiatives that enable us to do a better job with the government funds we already have, and those that help attract new sources of capital to bear on social problems. Topics will include recent efforts to improve measurement and evaluation of critical social services, new programs designed to help poor people access benefits for which they are already eligible, experiments in designing 'social finance' instruments that aim to monetize the value of raising people out of poverty, and others. These are collaborations between non-profit organizations and their allies in local, state and the federal government to harness new sources of philanthropic or other private investment in improving social welfare.

The progressive project would be wise to remember that these social innovations are in no way a capitulation to our current and fractured tail-wagging-the-dog politics. Rather, they represent a forward looking recognition that economic recovery and sustained, shared prosperity will require practical, cross-sector and creative solutions to our most pressing problems.

Georgia Levenson Keohane is a Fellow at the Roosevelt Institute.

In the latest installment of his series “Breaking Through the Jobless Recovery,” economist William Lazonick explores how the agency meant to protect stock market investors has instead promoted stock-price manipulation and stratospheric executive compensation.

In 1991, well-known compensation consultant Graef S. Crystal published In Search of Excess: The Overcompensation of American Executives in response to an explosion in executive pay that occurred in the US in the 1970s and 1980s. How, Crystal asked, did it make any economic sense for the CEOs in his sample of 200 large US corporations to be making 130 times the pay of the average American worker? And why were they making about seven times the compensation of their CEO counterparts at Japanese companies, many of which were out-competing their US rivals?

Yet the surge in top executive pay that Crystal observed 20 years ago pales in comparison to the volcanic eruption that has occurred since then. In the mid-2000s, top executive pay in the United States was about three times higher in real terms than the levels of the early 1990s. And the ratio of the average compensation of the CEOs of the largest corporations to that of the average worker climbed as high as 525:1 in 2000 before declining to what has become the "new normal" of about 350:1 in 2010. The gains from exercising stock options represent both the largest and most variable component of top executive pay, giving CEOs, CFOs, and other top dogs a huge interest in allocating corporate resources in ways that jack up their companies' stock prices -- most notably through stock buybacks that can run into billions of dollars per year.

Large corporations use buybacks to manipulate the stock market. And the fact that top corporate executives can sell the shares that they acquire from exercising stock options without any delay means that, avoiding any risk, they can capitalize on the short swings in their company's stock price that their corporate allocation decisions help to create. Nice work if you can get it! And guess how they got it? A gift of the regulator of US stock markets, the Securities and Exchange Commission (SEC).

In 1982 and 1991 the SEC - the US government agency which is supposed to protect stock-market investors from stock-price manipulation and short-swing profits by insiders -- promulgated rule changes that gave the wolves free access to the chicken coop.

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Under the Securities Exchange Act of 1934, large-scale stock repurchases can be construed as an attempt to manipulate a company's stock price. In November 1982, however, SEC Rule 10b-18 changed all that. The new rule provided companies with a "safe harbor" that assured them that manipulation charges would not be filed if each day's open-market repurchases were not greater than 25% of the stock's average daily trading volume for the previous four weeks and if the company refrained from doing buybacks at the beginning and end of the trading day. Under these rules, during the single trading day of, for example, July 13, 2011, a leading stock repurchaser such as Exxon Mobil could have done as much as $416 million in buybacks, Bank of America $402 million, Microsoft $390 million, Intel $285 million, Cisco $269 million, GE $230 million, and IBM $220 million. And, according to the rules, buybacks on these scales can be repeated day after trading day.

Stock-buyback programs -- say, $10 billion over four years -- require the approval of a company's board of directors. But, with a program in place, the company is not required to disclose the dates on which buybacks are actually done (a 2004 amendment to Rule 10b-18 only requires that a company report in its 10-Q filing repurchases in the previous quarter, well after the fact). So top executives who make decisions to do buybacks are privy to inside information that, as holders of stock options, can be very valuable to them.

Why did the SEC pass Rule 10b-18 back in 1982? According to a Wall Street Journal report dated November 10, 1982 on the new regulation, Rule 10b-18 "made it easier for companies to buy back their shares on the open market without fear of stock-manipulation charges". SEC Chairman John Shad, who had previously been a top executive at the Wall Street investment bank E. F. Hutton, was an advocate of the rule change. He argued that large-scale open market purchases would fuel an increase in stock prices that would be beneficial to shareholders. One of the SEC Commissioners, John Evans, argued that as a result of Rule 10b-18, some manipulation would go unprosecuted. But then he agreed to make the Commission's vote for the rule change unanimous.

Coincidentally, it happens that November 1982 was the start of what would be the longest stock-market boom in US history, lasting until the Internet bubble burst in late 2000. In the process, both stock buybacks and stock options became the yin and yang of US corporate executives.

As a complement to Rule 10b-18, in 1991 the SEC made a rule change that enabled top executives to make quick gains by exercising their stock options and immediately selling the acquired shares, thus avoiding any risk that the price of the acquired stock would decline before being sold. Under Section 16(b) of the 1934 Securities Exchange Act corporate directors, officers or shareholders with more than 10% of the corporation's shares are prohibited from making short-swing profits through the purchase and the subsequent sale of corporate securities within a six-month period. As a result, top executives who exercised stock options had to hold the acquired shares for at least six months before selling them.

Treating a stock option as a derivative, however, in 1991 the SEC deemed that the six-month holding period required under Section 16(b) was from the grant date, not the exercise date, of the option. Since all stock options take at least one year to vest from the grant date, the rule change meant that executives could now immediately sell the shares acquired by exercising options. The new rule eliminated the risk of loss between the exercise date and the sale date, and gave top executives flexibility in their timing of option exercises and immediate stock sales so that they could personally benefit from, among other things, stock-price boosts from buybacks.

In 1987, after leaving the SEC, John Shad donated $20 million to Harvard Business School (HBS) to fund the teaching of business ethics courses that could curb abuses on Wall Street. HBS subsequently had difficulty putting that money to its intended use. But it did manage to spend $20 million to build Shad Hall, an ultra posh fitness center designed especially for executives who attended the School's advanced management courses.

One does need to stay in shape to do buybacks and exercise options.

William Lazonick is director of the UMass Center for Industrial Competitiveness and president of The Academic-Industry Research Network. His book, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States (Upjohn Institute 2009) was awarded the 2010 Schumpeter Prize.

In the latest installment of his series "Breaking Through the Jobless Recovery," economist William Lazonick challenges the assumption that shareholders are the only ones taking risks in a business -- and therefore deserving of rewards.

Want to solve the mystery of the American economy's current employment and competitiveness problems? Take a close look at the current corporate obsession with "maximizing shareholder value." It sounds like a sound business principle, but in reality, it's based on a flawed ideology that leaves something crucial out of the business equation -- workers and taxpayers.

Let's review the decade of 2000-2009. During this time, companies in the S&P 500 index, accounting for about 75% of the market capitalization of publicly listed corporations in the United States, distributed 99% of their profits -- almost $4.3 trillion -- to shareholders.  Cash dividends were 41% of profits, while stock buybacks absorbed 58%. This left companies with precious little left over to invest in innovation and job creation (for more on this, see my paper on Innovation and Financialization).

At the most basic level, the rationale for maximizing shareholder value is that shareholders own the company's assets, and therefore have exclusive claim on its profits. A more sophisticated argument is that that among all stakeholders in the business corporation, only shareholders bear the risk of getting a positive return from the firm, while all other participants receive guaranteed returns for their productive contributions. If we want risk-bearing, so the argument goes, we need to return value to shareholders.

This argument sounds logical -- until you question its fundamental assumption. Especially in a "knowledge economy" that can generate innovation, the productive assets of a business enterprise reside in human capital as well as physical capital. And while shareholders may presume to own physical capital, they can't claim to own human capital (we no longer permit slavery, which is why we do not show human, or intangible, assets on the firm's balance sheet). And if you think about it, shareholders are the only participants in the business enterprise who make investments in productive resources without a guaranteed return. In an innovative economy, workers and taxpayers make these risky investments all the time!

When you work for a company, you may contribute your time and effort over and above the levels required by your current remuneration to a collective and cumulative innovation process. By definition, this innovation process can only generate returns in the future (otherwise it would not be innovation), and because the innovation process is uncertain, it may not in fact generate returns. As a member of the firm, therefore, you bear the risk that your extra time and effort won't yield the gains to innovative enterprise from which you can be rewarded. But if the innovation process does generate profits, then you, as a risk-bearer, have a claim to a share in the forms of higher earnings and benefits.

Taxpayers also invest in the innovation process without a guaranteed return. Through government agencies, taxpayers fund infrastructural investments that, given required levels of financial commitment and inherent uncertainty of economic outcomes, business enterprises would not have made on their own. These state agencies also provide businesses with subsidies that encourage investment in innovation.

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In terms of investment in new knowledge with applications to industry, the US has been the world's foremost developmental state. It is impossible, for example, to explain US dominance in computers, microelectronics, software, and data communications without recognizing the role of government in making investments that developed new knowledge and facilitated its diffusion. As another prime example, the 2010 budget of the US National Institutes of Health (NIH) for life sciences research was $30.9 billion, almost double in real terms the budget of 1993 and triple that of 1985. Since the founding of the first national institute in 1938, NIH spending has totaled $738 billion in 2010 dollars (for further discussion, see my paper on Biopharmaceutical Finance).

More generally, the US government has made investments to boost the productive power of the nation through federal, corporate, and university research labs that have generated new knowledge as well as through educational institutions that have developed the capabilities of the future labor force. Businesses have taken full advantage of this knowledge and capability. In funding these investments, taxpayers have borne the risk that the nation's business enterprises would further develop and utilize these productive capabilities in ways that would ultimately redound to the benefit of the nation, but with the return to taxpayers in no way contractually guaranteed.

And there's more: Federal, state, and local governments often provide cash subsidies to businesses, both established and new, to develop new products and processes. The public has funded these subsidies through current taxes, borrowing against the future, or by making consumers pay higher product prices for current goods and services than would have otherwise prevailed. Multitudes of business enterprises have benefited from subsidies without having to enter into contracts with the public bodies that have granted them to remit a guaranteed return from the productive investments that the subsidies help to finance.

So the ideology of maximizing shareholder value provides a flawed rationale for excluding workers and taxpayers from sharing in the gains of innovative enterprise. To turn this idea on its head, ask yourself: What risk-bearing role do public shareholders play in the innovation process? Do they confront uncertainty by strategically allocating resources to innovative investments? No. As portfolio investors, they diversify their financial holdings across the outstanding shares of existing firms to minimize risk. They do so, moreover, with limited liability, which means that they are under no legal obligation to make further investments of "good" money to support previous investments that have gone bad. Even for these previous investments, the existence of a highly liquid stock market enables public shareholders to cut their losses instantaneously by selling their shares -- what has long been called the "Wall Street walk".

The modern corporation has brought about a fundamental transformation in the character of ownership, as Adolf Berle and Gardiner Means recognized almost 80 years ago in "The Modern Corporation and Private Property." As property owners, public shareholders own tradable shares in a company that has invested in productive assets. In an innovative enterprise, however, the most important productive assets are human. In a free society, human assets can't be owned by others. Through massive distributions to shareholders, dominated by stock buybacks, the ideology of maximizing shareholder value is robbing taxpayers and workers of returns to the risks that they took -- and in the process undermining the innovative capability of the US economy.

William Lazonick is director of the UMass Center for Industrial Competitiveness and president of The Academic-Industry Research Network. His book, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States (Upjohn Institute 2009) was awarded the 2010 Schumpeter Prize.

Conventional wisdom says that the job crisis stems from a mismatch in the labor market or lack of business confidence. But in his special ND20 series, "Breaking Through the Jobless Recovery", economist William Lazonick points the finger at stock manipulation.

Where have all the good jobs gone? As I outlined last week, the disappearing act of decently-paid and stable "middle class" employment opportunities in the US economy over the last three decades is the result of the triple-whammy of plant closings ("rationalization"), the end of career employment with one company ("marketization), and offshoring ("globalization").

In a world of rapid technological change and global development, our economy, with its heritage of capabilities for knowledge creation by government, academia, and business, should have been able to replace these lost jobs with even better ones. Through a combination of business and government investment, a "knowledge economy" can generate plenty of opportunities for educated and experienced workers, and many US corporations have been and remain world leaders in innovation.

And yet the jobs aren't here. Because increasingly, over the past three decades, the executives who run major US business corporations have become far more concerned with allocating corporate resources to boost their companies' stock prices than to invest in innovation in the United States.

The main instrument for boosting stock prices is the stock buyback (or stock repurchase).  With the prior approval of the company board for a program of buybacks of, say, $10 billion, over, say, four years, executives can then do open market repurchases at their discretion.  Stock buybacks can be very useful for meeting the quarterly earnings-per-share targets so closely watched by Wall Street analysts. Buybacks can also help to offset a stock-price decline from bad news such as a failed product. Or they may be used to counter short sales by stock-market speculators, as was done by Wall Street banks just prior to the 2008 financial meltdown.

In other words, buybacks can be used to manipulate the stock market.

In the United States, stock buybacks are huge. From 2000 through 2009 S&P 500 companies -- which account for about 75 percent of the market capitalization of all US publicly-listed corporations -- spent more than $2.5 trillion on stock buybacks, equal to 58 percent of their net income. In addition, these companies distributed dividends equal to 41 percent of net income over the decade, bringing the total payout ratio (buybacks plus dividends) to 99 percent. The average buybacks per S&P 500 company more than quadrupled from less than $300 million in 2003 to over $1.2 billion in 2007, before falling to around $700 million in 2008 and $300 million in 2009. Average buybacks rebounded to $600 million in 2010, however. And they're on pace to total at least $700 million per company in 2011, or $350 billion for the S&P 500 as a whole.

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Executives like to say that buybacks are financial investments that signal confidence in the future of their company as measured by its stock-price performance. In fact, however, companies that do buybacks never sell the shares at higher prices to cash in on these investments. To do so would be to signal to the market that its stock price had peaked, something that no executive would ever do. But at the same time, these same executives use the stock boosts from buybacks to enrich themselves by exercising their very ample stock options and immediately selling the acquired stock to lock in the gains. And guess what? The gains from exercising stock options represent the most important component of outsized executive pay.

In short, as US business corporations have profited from the trends of rationalization, marketization, and globalization, top executives have used those profits to engage in a massive manipulation of their stock prices at the expense of job creation and innovation. From this perspective, the primary cause of the current jobless recovery is neither a mismatch in the labor market nor a lack of business confidence -- two conventional arguments for explaining the sluggishness of reemployment operating, respectively, on the supply-side and the demand-side of the labor market.

The "mismatch" argument is that the skills that workers possess do not match the skills that employers need. But this argument does not explain how, for the vast majority of workers, a "match" is made. The prime reason why the US economy gets a match between the capabilities of labor supplied and labor demanded is because business corporations invest in the capabilities of the types of workers whom they require. From this perspective, a so-called mismatch results from a failure of business corporations to make these investments in the training -- both formal and on-the-job -- of the US labor force. On top of that, as globalization continues, already-educated and trained US workers undergo permanent job loss in their areas of specialization. Valuable human capital quickly atrophies. The decline of middle-class jobs stems from the changed employment practices of US business corporations, exacerbated by their financialized behavior that leads them to favor buybacks over job creation.

It is this financialized corporate behavior, not a lack of business confidence, that stands in the way of a renewal of high-quality employment opportunities in the US economy.  Highly profitable US corporations are currently sitting on almost $1 trillion in cash, even after a sharp rebound in stock repurchases in 2010 and the first quarter of 2011. Rather than manifesting a lack of business confidence, these cash hoards reflect a desire by corporate executives to have funds available for stock repurchases in the years ahead as companies compete through an escalation of repurchases to boost their stock prices as was the case in 2003 to 2007.

The globalization of the labor force for educated and experienced workers is here to stay. But, for the sake of sustainable prosperity, the financialized business corporation has to go. In the absence of a change in corporate financial behavior, the future of the US economy is more booms, busts, and jobless recoveries, with each boom more speculative, each bust more devastating, and each recovery more jobless than the one before.

William Lazonick is director of the UMass Center for Industrial Competitiveness and president of The Academic-Industry Research Network. His book, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States (Upjohn Institute 2009) was awarded the 2010 Schumpeter Prize.