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the equality issue

March 25, 2019

○ the battle for transgender rights 56 ○ LLOYD’S OF LONDON looks male and pale 62 ○ how to make your company more gay-friendly 68

college is a racket REBECCA KANTAR, founder of testing startup IMBELLUS

THIS HARVARD DROPOUT SAYS SHE HAS A BETTER WAY 44

ADVE RTI S E M E NT

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the Best Ideas Out of Your Next Brainstorming Session

A good brainstorming session can be pivotal for any business, but a bad one can leave participants with lower morale and the feeling that they’ve just wasted a few hours at work. Follow these steps to set up your next brainstorming session for success:

4 Provide tools and tasks that spark innovation

Consider starting with an icebreaker, such as inviting participants to create a vision board that draws inspiration from your company or the problem you’re hoping to solve. Provide posters, scissors, glue or magnets and plenty of magazines, postcards and photos with which they can create the board.

1 Be smart about scheduling and the setting

Other props that might help trigger ideas include a deck of cards with thought starters, or blank mind map templates that people can use to organize information and thoughts. Participants should also arrive to the session prepared with some written ideas recorded in journals and notebooks. This will help the team think about solutions in advance, and to come to the meeting owning their ideas and ready to share.

2 Invite the right people

Phillips & Co., an Illinois-based innovation consultancy that has worked with brands including Hyatt and Verizon, often creates custom tools for brainstorming sessions, such as worksheets or maps showing a customer’s journey. “You’re trying to take very conceptual ideas and make them physical,” says company President Matt Phillips. “Paper is the best tool for that. It allows you to take something that might be a service or process and turn it into a sketch. Then people around the table can play with it or modify it using markers or pens.”

Getting out of the office can help participants focus on the task at hand. Choose a brightly lit space with plenty of room to move around. To encourage collaboration, place large easel pads or hang posters around the room that people can use to sketch out ideas. Start early in the day, so that participants won’t be worried about getting out to head home.

While you’ll need to invite the core members of your team, you may want to cast a wider net. “Diversity is important to increase the creative potential of the group,” says Keith Sawyer, author of Group Genius: The Creative Power of Collaboration and a professor at the University of North Carolina. “It’s important to have people who bring different bodies of knowledge that might be relevant to the problem.” Everyone in the group should feel like they’re participating, so if you have more than eight to 10 participants, consider breaking into smaller groups.

5 Appoint a leader to keep things moving

If participants are on laptops and smartphones, it will be easier for them to become distracted. Instead, hand out notebooks, pens and markers, and ask everyone to turn off their electronics for the session.

While you want ideas to be free-flowing, you also want to ensure that the team is able to remain focused. Make sure everything is written down: In addition to having one person lead the brainstorming session, you’ll also want to appoint a note-taker to capture the ideas generated throughout the day and to create a report afterward. Even a small thought that might seem inapplicable in the moment could ultimately morph into just the idea that you run with.

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March 25, 2019

◀ Clockwise from far left: Transgender workers Christian Oropeza, Victoria Starrett, Julian Harris, and Donna Rose

PHOTOGRAPHS BY ZACKARY DRUCKER FOR BLOOMBERG BUSINESSWEEK

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SPECIAL ISSUE

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The Business of Equality

44 51 52 55 56 62 67 68 72

Fixing the college admissions mess with video games. Yes, video games The wealth gap between black and white households is widening A dating app that’s also helping gay Chinese men have kids Natural disasters have a way of making inequality worse Transgender workers encounter discrimination, misperceptions—and triumphs Harassment is common. Drinking is expected. Welcome to Lloyd’s of London Gender roles are loosening, but there’s still a ways to go How Dow Chemical became an unlikely refuge for LGBT rights California gets more women a place at the board table

◼ CONTENTS

◼ REMARKS

7 8 8

The Fed and interest rates; $23 million for Boeing’s CEO Apple streams; Ukraine’s front-runner; wine at Sotheby’s India has to fight harder against fake news

10

One takeaway from Christchurch: Regulate social media

1

BUSINESS

14 16 17

As Levi’s goes public, it’s thinking beyond jeans How Yum China uses AI to dominate fast food Booking.com’s Glenn Fogel on competition

2

TECHNOLOGY

18 20 21

State AGs’ plodding effort to break up Big Tech Trump finally names a tech czar Intel places a risky bet on memory chips

3

FINANCE

23 26

Recovery for Europe’s banks will be slow and painful The high bar for CalPERS’s new investment chief

ECONOMICS

28 31

Modern Monetary Theory isn’t fringe anymore To boost trade, Italy joins “Belt and Road”

POLITICS

34

▼ Private prisons in Britain are controversial—but thriving

4

March 25, 2019

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37 38

A banished billionaire could sway the Thai elections Washington’s cop museum, open since October, is a bust

Cover: Photograph by Rozette Rago for Bloomberg Businessweek

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 IN BRIEF ○ Deutsche Bank and Commerzbank said they’re in exploratory talks to merge, potentially creating a German banking champion after years of failed cost cuts and management shake-ups.  23

By Benedikt Kammel

○ U.S. Federal Reserve officials left interest rates unchanged.

In a sign of concern about economic growth, the Fed also lowered its projected interest-rate increases this year to zero and said it would stop reducing its bond holdings in September.

○ Boeing revealed that CEO Dennis Muilenburg was paid

$23.4m for 2018, a big increase from the previous year. The announcement comes as the company grapples with the aftermath of two 737 Max crashes.

○ Bayer shares slumped after the German chemicals company lost the first round in a U.S. jury trial over claims that its Roundup weed killer causes cancer.

€62.71 3/20/19 €60.51 12/20/18 FLOODS: JEFF BUNDY/OMAHA WORLD-HERALD/AP PHOTO. NAZARBAYEV: AP PHOTO. ARDERN: WIKTOR SZYMANOWICZ/GETTY IMAGES

March 25, 2019

○ “The government cannot legitimately submit the same proposition or substantially the same proposition as that of last week, which was rejected.”

○ High-water records were set across Nebraska in this week’s flooding, and authorities have had to rescue at least 175 people. More rain is on the way.

○ Nursultan Nazarbayev, Kazakhstan’s leader-for-life, resigned after 29 years in power. He was succeeded as president by Chairman of the Senate Kassym-Jomart Tokayev. The Senate elected Dariga Nazarbeyeva, Nursultan’s daughter, as its new chairwoman, putting her in the line of succession to the presidency.

○ Norway’s Norsk Hydro, one of the world’s biggest aluminum producers, suffered production outages after a cyberattack affected operations across Europe and the U.S.

○ Fidelity National Information Service plans to buy Worldpay for about

○ New aland Prime Minister Jacin Ardern s s her govern nt will overhaul gun laws after the worst mass shooting in the nation’s h history left 50 people dead at two mos ues in the South Is nd city church. of Christc  10

$34b

in cash and stock, the biggest deal ever in international payments.

7

Speaker John Bercow of the House of Commons detonated Prime Minister Theresa May’s effort to call another vote on her Brexit plan after two previous attempts ended in humiliating defeat, throwing her departure road map into crisis.

○ Cyclone Idai, striking Mozambique on March 15, may have killed more than 1,000 after widespread flooding. ○ Authorities apprehended a Turkish-born gunman who murdered three people on a tram in the Dutch city of Utrecht. ○ Manila, the capital of the Philippines, is reeling from its most severe water shortage in nearly a decade. ○ France has banned some yellow-vest protests after riots on the main boulevards destroyed luxury stores.

◼ AGENDA

Bloomberg Businessweek

▶ Apple to Take a Bite Out of Netflix Apple will unveil a streaming service on March 25 that combines original content with programming from HBO, Starz, and other partners. The offering opens a battlefront with Hollywood studios, Amazon, and Netflix, which says it won’t be part of the platform.

March 25, 2019

▶ Felix Sater, a former business partner of Donald Trump, appears on March 27 at a congressional hearing probing his role in a Moscow skyscraper plan.

▶ Shares in Lyft, the second-largest U.S. ridehailing service behind Uber, will begin trading on the Nasdaq Global Select Market on March 29.

▶ Ukraine holds presidential elections on March 31. Volodymyr Zelenskiy, a TV comic who likes to poke fun at the country’s elites, is leading in opinion polls.

▶ Local Turkish elections on March 31 could be a referendum on President Recep Tayyip Erdogan’s rule and a gauge of his support in Istanbul and other cities.

▶ Mexico’s central bank unveils its interest-rate decision on March 28. Inflation in the country has slowed, lifting expectations of a rate cut later this year.

▶ Sotheby’s March 29-31 wine auction in Hong Kong could set records, fetching as much as $26 million for almost 17,000 bottles from one collection.

8

India vs. Fake News ● In the deadly battle against disinformation, New Delhi shows what not to do

For online trolls, India might be the world’s fattest target. Nearly a billion people are registered to vote in the country’s upcoming elections, the largest in history. Meanwhile, India is one of the fastest-growing markets for social media platforms and messaging apps. The potential for hoaxes, slander, rumors, and sundry other misinformation to influence voters is vast. The country’s efforts to combat that threat, however, risk undermining the very democracy they’re meant to save. The challenge India faces is emblematic. Misinformation is upending politics and worsening tensions across the developing world. It’s even contributed to violence, from the pogroms of Rohingya in Myanmar stoked by Facebook posts to lynchings in India sparked by rumors on WhatsApp. Several vulnerable democracies are also going to the polls this year. India’s approach to the problem is something of a test case. Unfortunately, it’s making a hash of it. A recently published set of draft regulations would impose drastic if not impossible obligations on platforms. One rule would force them to break end-to-end encryption if asked to trace the source of objectionable content, a demand that could worsen security, eliminate privacy, and undermine freedom of speech. Another rule would require companies to use automated filters to

police content that is, among other things, “blasphemous, defamatory, obscene, pornographic, paedophilic, libellous, invasive of another’s privacy, hateful, or racially, ethnically objectionable, disparaging, relating or encouraging money laundering or gambling, or otherwise unlawful in any manner whatever.” The algorithm that could decide what content falls into such categories hasn’t been invented yet. Making matters worse, such vague strictures are an invitation to official abuse. Virtually any government agency could demand that a post be taken down or its author traced. It’s not hard to imagine such powers being misused to censor criticism, attack political opponents, or facilitate corruption. A better approach is clearly needed. As India and other countries confront this challenge, their primary goal should be protecting citizens and democratic discourse. That means chipping away at disinformation without violating fundamental privacy rights or suppressing freedom of speech. Tech companies will of course be on the front lines of this fight. Although they’ve taken some welcome steps recently—including hiring more staff to police disinformation, making political ads more transparent, and weeding out fake accounts—they’ll need to do more. Boosting investment in fact-checkers, public-education campaigns, and tools that help users learn to question what they encounter online would be a start. Platforms should also warn users about fake content they’re likely to see and make it easier to flag dubious posts. Giving independent researchers access to internal data, meanwhile, could help weed out potential vulnerabilities. Written by the Bloomberg Opinion editorial board

ILLUSTRATION BY PETER GAMLEN

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◼ REMARKS

10

When Lives Are on the Line

◼ REMARKS

Bloomberg Businessweek

● After the New Zealand massacre, will governments begin to regulate how social media oversees content?

PHOTO ILLUSTRATION BY 731; PHOTO: ALAMY

● By Polly Mosendz and Gerrit De Vynck Evil travels freely on the internet. It flickers before us in plain sight. Yet, despite the livestreamed horror of March 15 in Christchurch, New Zealand, enacting social media reforms will take massive efforts in regulation, requiring the cooperation of the tech giants, governments, and consumers. In a perfect world, YouTube’s and Facebook’s algorithms would race through a video as soon as someone tries to upload it. If the machines recognize troubling content or a video that’s already been banned, the images would never reach the public. So what happened in New Zealand? Alleged gunman Brenton Tarrant had an audience of only about 200 people during the 17 minutes he broadcast his attack on the Al Noor mosque in Christchurch. Yet, though Facebook Inc. took the video off Tarrant’s page 12 minutes after the livestream ended, hundreds of thousands of clones of the footage were produced and circulated on the internet. The video was reposted on Twitter, where it auto-played on the timelines of unsuspecting users; it appeared in Reddit’s infamous “Watch People Die” forum, which is exactly what its name says it is; and, of course, it showed up on YouTube, the world’s leading video-hosting site. Facebook managed to stop 1.2 million copies from circulating on its site—but 300,000 still got through. At its peak, the video was uploaded once per second, YouTube Chief Product Officer Neal Mohan told the Washington Post. Google’s and YouTube’s AI censors work well for videos they’ve had time to “learn” to recognize, such as previously collected terrorist propaganda or child pornography cataloged by police officers. To a certain extent, the algorithms may spot permutations of that footage. They still struggle, however, with what’s going on in clips they’ve never seen, according to Rasty Turek, chief executive officer of Pex, a startup that helps companies identify videos infringing on copyright. Even if the platforms identify fresh material as objectionable, the people who post it can use simple tricks like changing the size of the clip, speeding it up or slowing it down, or simply flipping it on its side to fool the algorithms. Google and Facebook have spent years trying to find ways to stop problematic videos from appearing on their websites. YouTube’s Content ID tool, which has been around for more than a decade, gives copyright owners such as film studios the ability to claim content as their own, get paid for it, and have bootlegged copies deleted. Similar technology has been used to identify illegal or undesirable content. But when a new video circulates, it can be copied, altered in a minor way, and re-uploaded, slipping past the censors. “It’s whack-a-mole,”

March 25, 2019

Turek says. “People are genius at these things. They will figure out how to get something past it.” At congressional hearings in the U.S. over the past two years, executives from Facebook and YouTube said they were investing heavily in artificial intelligence that would be able to find and block violent and graphic videos before anyone saw them. But if all you have is a split second, how do you distinguish fact from fiction, and freedom of expression from murderous reality? Getting from AI’s idealistic intentions “to understanding the context of a video is like a frog understanding a grocery store,” Turek says. By the point in the livestream when Tarrant left his car and entered the mosque, it was too late to save lives. But could social media platforms have stopped him long before that? Perhaps, if they’d recognized the warning signs in Tarrant’s online behavior. Two days before the assault, he posted multiple photographs on Twitter of assault-style firearms and ammunition, marked with telltale writing. Among the inscriptions were the names of accused mass murderers: Alexandre Bissonnette, convicted of killing six Muslims at a mosque in Canada; Luca Traini, a neo-Nazi convicted of shooting six African immigrants in Italy; and Josué Estébanez, who killed a teenager who was protesting fascism in Spain. Tarrant made multiple mentions of “14,” a reference to the 14-word-long white supremacist slogan. Also on view was a bulletproof vest covered with symbols commonly used by neo-Nazis: a Celtic cross and the black sun—or Sonnenrad—patch. Even before posting photos of his weapons, Tarrant spent weeks tweeting out racist videos, calling immigrants “invaders,” and claiming white people were being subjected to genocide. He also posted a link to an 87-page manifesto to Twitter hours before the shooting. None of this behavior raised red flags at Twitter. His profile remained active until the murder spree in New Zealand. Tarrant is an Australian citizen, but in the U.S., where Twitter is based, his tweets would have been largely protected by the First Amendment to the U.S. Constitution. The rifle photos, however, could press against the boundary of inciting violence. “Putting the name of a mass shooter on your rifle is pretty much the same as yelling ‘fire’ in a crowded theater,” wrote Robert Evans, who reports about right-wing extremism for the online investigative journalism site Bellingcat. “If you’re posting pictures of your rifle with the names of other mass shooters on it, [Twitter] should look into where that guy is posting from and inform law enforcement.” Following the attack, Twitter removed Tarrant’s profile. By then, however, users on YouTube had already preserved it and uploaded videos that scrolled through his account, which included links to the manifesto. YouTube also became home to numerous re-uploaded versions of the original Facebook Live broadcast. Internet service providers in New Zealand took matters into their own hands, blocking a website popular with white supremacists where the video was spreading. “It’s an unprecedented action,” tweeted Jason Paris, CEO of Vodafone New Zealand Ltd., when questioned about whether the

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◼ REMARKS

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Bloomberg Businessweek

internet service provider was engaging in censorship. “However, terrorism won’t get any oxygen from Vodafone.” The world’s democracies have been reluctant to remove content from the web, though, fearful of mirroring the policies of more restrictive regimes, such as China. “While the intent may be to protect citizens from bad stuff, rather than to regulate or coerce, progressives would have a hard time squaring their love of freedom with shutting off access to things like YouTube or Facebook,” says Ari Ezra Waldman, a professor at New York Law School who studies technology regulation. Hate speech is banned in Australia—though penalties are relatively light, mostly resulting in apologies. But in New Zealand the Department of Internal Affairs declared that sharing the March 15 video was a crime. Legislators also quickly proposed a ban on semi-automatic rifles like those used in the attack. And, in the wake of the massacre, politicians have called for regulation of social media companies, which have been highly resistant to policing their own content. In the U.S., despite slews of congressional hearings, lawmakers have been reluctant to impose restrictions on technology companies. Some have tried to put together a federal online privacy bill, but to no avail. A bill that would have restricted online political advertising lost steam when its Republican sponsor, Arizona Senator John McCain, died. Congress did pass a law that makes online platforms bear some responsibility for activity on their sites—but limited it to sex trafficking. If the U.S. doesn’t find a way to regulate internet content and establish watchdogs, could the American tech giants be forced to do so by overseas pressure? The European Union has imposed fines on Google and others for antitrust issues. Last year it enacted the General Data Protection Regulation, which includes “the right to be forgotten,” requiring companies to delete data on any individual who asks them to. Data collectors also need to get consent from people before storing their information. Some U.S. companies have already complied with the European rules worldwide. Could the EU likewise force U.S. companies to increase management of the content that reaches its market of 500 million people? The scale of the undertaking might just make compliance universal. Immediately after news of the massacre broke, lawmakers in Europe were calling for regulation. “We’ve heard a lot today about taking back control,” Tom Watson, deputy leader of the U.K.’s Labour Party, said on the radio. “Well, today the big social media platforms lost control. They failed the victims of that terrorist atrocity. They failed to show any decency and responsibility. And we can’t go on like this. Today must be the day when good people commit to take back control from the wicked, ignorant oligarchs of Silicon Valley.” Sajid Javid, the U.K. home secretary, also expressed frustration with Facebook, Google, and Twitter for allowing extremist content. “Take some ownership,” he tweeted on March 15. “Enough is enough.” “At some point, we will have to regulate,” said Frans Timmermans, a Dutch politician who serves as the first vice

March 25, 2019

president of the European Commission, at the World Policy Forum on March 18. “The first task of any public authority is to protect its citizens—and if we see you as a threat to our citizens, we will regulate. And if you don’t work with us, we will probably regulate badly.” The imagery that populated Tarrant’s posts would be difficult to find in Germany. After World War II the country banned the symbols of “unconstitutional organizations”: swastikas, the Aryan fist, the Iron Cross, and others. In 2017 it passed the Network Enforcement Act, which fines social media platforms that fail to remove illegal content, including hate speech, defamation, and calls for violence. “By far, the largest numbers of people who work to remove hateful comments for Facebook are Germans working in Germany, far more than there are in the U.S., even though the U.S. is a far larger country,” says Henry Fernandez, a senior fellow at the Center for American Progress who studies the role of technology companies in radicalization. Europe is far more willing to regulate content online because of its history with fascism. “European interpretations of the importance of free speech are simply different,” says Waldman of New York Law School. “The cultural memory is very much tied to the horrors of World War II.” In February, Germany’s federal cartel office—which oversees antitrust issues—imposed “far-reaching restrictions” on the way Facebook and its WhatsApp and Instagram subsidiaries collect, combine, and deploy user data. The country’s policing of social media giants has caught the attention of EU regulators. “We study it with the same great interest because of the two legs, both that Facebook is a dominant player in this market but also how they interpret privacy rules,” EU Competition Commissioner Margrethe Vestager told Bloomberg in early February. Both Waldman and Fernandez believe European countries are more likely than the U.S. to regulate radical and violent content online. In New Zealand, Prime Minister Jacinda Ardern focused on Facebook in front of Parliament on March 19, saying, “They are the publisher, not just the postman. There cannot be a case of all profit, no responsibility.” Still, in the U.S., threats to the bottom line are more effective than lobbying Congress to restrict platforms that promote white supremacy. Companies such as Procter & Gamble Co. or Walt Disney Co., which spend hundreds of millions of dollars a year on YouTube alone, have pulled ads when criminal or terrorist content popped up on the platform. “The companies are driven first and foremost by a profit motive,” Fernandez says. The algorithms they use “do not prioritize curbing hate online. Profit first.” That situation may change with a new generation of U.S. legislators. “As younger people are being elected,” Fernandez says, “they are engaging aggressively on social media as a way to communicate. I would anticipate they would then come with a different understanding of what regulation might look like over time.” The question is: What can social media companies do right now to prevent the next massacre?

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Bloomberg Businessweek

March 25, 2019

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Edited by James E. Ellis and Dimitra Kessenides

Levi Strauss Wants to Be Bigger Than Jeans

GETTY IMAGES. ALAMY

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DATA: COMPANY REPORTS

 BUSINESS

Bloomberg Businessweek

○ The company counts on tops to boost sales as it prepares to go public again

beyond the entrance, the first thing visitors see are piles of T-shirts, sweatshirts, and accessories. The company has struck a licensing deal with Peanuts, a comic franchise with broad nostalgic appeal, so there are Snoopy backpacks, jackets, hats, socks, and even boxer briefs. Jeans are nowhere in sight, until you head to the basement. The shift to tops has been led by Chip Bergh, who became chief executive officer in 2011. He arrived after almost three decades at Procter & Gamble Co., where he helped integrate Gillette after its $61 billion acquisition and then ran the men’s grooming unit. When Bergh joined Levi’s it was overloaded with debt—the result of a leveraged buyout by the founding family, who took the company private in 1985 and spent billions more purchasing shares from other Strauss descendants to consolidate ownership. Bergh, who declined to comment for this article, replaced most of the top management, paid off debt, and cut costs, including reducing the head count by about 7 percent. That freed up capital, allowing him to embark on a classic brand expansion strategy: He boosted marketing—among other things, acquiring the naming rights to the stadium of the NFL’s San Francisco 49ers—and began expanding sales overseas. He opened a product lab a few blocks from the San Francisco headquarters to speed innovation, and in 2015 relaunched Levi’s women’s business, which has seen its sales increase for 14 straight quarters. Levi’s now makes jeans blended with Spandex to add stretch—and comfort. Revenue from Asia and Europe has grown to 45 percent of all sales. Bergh has multiplied the number of companyoperated stores by 75 percent, to more than 800, giving it a bigger platform to reshape its image. “Everywhere I look I see upside” and “someday a $10 billion brand,” Bergh wrote in a piece for the Harvard Business Review last year. In late February, Levi’s disclosed plans for an IPO, targeting a share price of $14 to $16. In a positive sign, on March 20, Levi’s sold 36.7 million shares at $17 each, raising $624 million. The stock was set to begin trading on March 21. There are still plenty of risks for investors. While profitability has improved, sales growth has averaged less than 3 percent a year since Bergh’s arrival, though it’s accelerated since 2017. The company points to China as a market with lots of potential. The country, which accounts for 20 percent of the global apparel market, contributes just 3 percent of Levi’s sales, or $167 million. But its economy is slowing. Then there are people like Willy Davis, a

In 1873, German immigrant Levi Strauss founded an industry when he began outfitting California gold miners with blue jeans. His company evolved by innovating—adding belt loops, for example—and expanding its product line, making clothing for women, kids, and teenagers. By the middle of the last century, Levi’s jeans were an American icon. In the 1980s competition from the likes of Calvin Klein and Gap dethroned Levi Strauss & Co. Fashion shifted away from denim, to khakis in the 1990s and more recently to athleisure’s mix of workout gear and casual clothing, adding to its woes. Now the company synonymous with pants says it’s found a strategy to revive its past glory: tops. Sales of Levi’s tops doubled in the past five years, to more than $1 billion. The category— encompassing button-downs, sweatshirts, and fleece cover-ups—generated more than half the company’s growth during that period, and now accounts for about 20 percent of revenue. That success is the main reason its executives decided to take Levi’s public again. They can pitch investors on the brand’s ability to evolve, this time into a label making everything from hats to shoes. “That’s the goal, to be more than just a jeans brand,” says Michael Zuccaro, an analyst for Moody’s Investors Service who covers the company’s publicly traded bonds. The growth in tops “shows people are buying the brand, it’s not only Levi’s bottoms.” He adds that changing the consumer’s mind about a brand is extremely hard to do. Prior efforts to get beyond men’s jeans faltered, and sales slowly declined, dropping from $7 billion in 1997—almost $11 billion today, adjusted for inflation—to $4.1 billion in 2009. But last year the company posted $5.6 billion in sales, representing growth of 14 percent, its best mark in more than a quarter century. Tops played a major role, growing 37 percent, almost five times the rate of pants. During that same 20-year stretch, Nike Inc. crossed over into fashion from athletic performance and increased revenue to almost $40 billion. But it’s an outlier. After initial breakthroughs, many brands fail to make the leap into new categories. Under Armour Inc., struggling to become a fashion brand, has stepped back from a push into trendier attire. A visit to Levi’s flagship store in New York’s Times Square shows how hard it’s trying. Just

March 25, 2019

○ Share of Levi’s sales  Pants  Other apparel 100%

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○ Levi’s revenue $6b

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restaurants. The next step is to harvest data from the more than 180 million Chinese who belong to KFC and Pizza Hut loyalty programs and use artificial intelligence to customize a menu for each diner based on preferences and local tastes. Yum says the AI-powered menu, introduced in January, has already boosted average per-order spending by 1 percent—the equivalent of about $840 million worth of fried chicken and pan pizzas each year. China’s biggest fast-food operation, Yum is seeking to maintain its dominance amid intensifying competition from a newly assertive McDonald’s Corp. (under Chinese management since 2017) and smaller U.S. chains such as White Castle and Shake Shack, as well as local fast-food operations looking to undercut the incumbents on price. Yum accelerated its expansion last year to two stores a day—the company says it will have 10,000 by 2021. It’s betting the AI-powered menu and increasing automation will help cut costs, boost sales, and outsmart rivals. “We need to stay ahead of the clear trend in digital development,” Chief Executive Officer Joey Wat says. “That’s the future.” When Yum China was spun off from parent Yum! Brands Inc. in 2016, the rationale was simple: Executives sitting in Louisville couldn’t possibly keep up with all the developments in China, where consumers are uncommonly tech-savvy and ready to try new things. In big urban centers, shopping is increasingly cashless, convenience stores are unmanned, and everything from forks to furniture can be delivered within hours. For most Chinese, such convenience has so far trumped privacy concerns, so companies such as Yum are able to collect customer data with relative impunity. The menu on KFC’s app pushes items to customers based on their ordering patterns and

▲ Self-service machine at a KFC restaurant in Tianjin

stylish 37-year-old from Harlem. He bought his first pair of Levi’s jeans a couple of years ago and says he loves the fit. As he shops the Levi’s department at Macy’s flagship store in Manhattan, he barely notices the shirts. Two-thirds of the company’s sales still come through Macy’s and other wholesale accounts, and in these locations, the focus remains piles of jeans. “I’m not really feeling their tops,” says Davis, a program supervisor at Manhattan’s Intrepid Museum. “I grew up thinking Levi’s jeans, and I guess that’s how a lot of people think.” �Matthew Townsend

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How A.I. Ate the Colonel ● Yum China is betting on cashless stores, innovative food items, and customized service

In Shanghai’s southeastern district of Xujiahui, Colonel Sanders’s smiling visage looms over the restaurant entrance, as it does at thousands of KFC locations around the globe. But step inside, and it quickly becomes clear that this is no ordinary KFC. Customers line up before a row of touchscreen kiosks, keying in orders while a camera scans their faces to process payment in less than a second. Downstairs, a robot arm whirs to life to prepare an ice cream cone. Diners can choose the joint’s background music via app and listen to a favorite tune while they eat. So far only a few hundred KFC locations have been similarly tricked out. But Yum China Holdings Inc. says 86 percent of transactions are already cashless and about half of orders are placed via mobile app or digital kiosk at its more than 8,400 KFC, Pizza Hut, and Taco Bell

“Loyalty to any chain is fragile”

KFC: ZHANG PENG/GETTY IMAGES. FOGEL: WEI LENG TAY/BLOOMBERG

THE BOTTOM LINE Forever known as a men’s jeans brand, Levi’s is trying to sell investors on its ability to expand beyond pants to other apparel and accessories.

◼ BUSINESS

local demographics. “The menu is customized based on who they are, and it takes less time to order food, so customers are happy,” Wat says. “We know the transaction pattern of each store, which lets us do better forecasting, which means we have less waste. And that enables us to achieve better margins and be very careful about increasing prices.” The selection bears little resemblance to the value meals and buckets of traditional Middle America KFC. In China, fried chicken is sold by the piece and easily mixed and matched with such local favorites as rice rolls, egg tarts, and lotus soup. Car salesman Xia Baohua, a KFC regular who tries to eat healthy, sees soup or corn when he opens the app rather than fries or ice cream. Xia, 48, typically gets a piece of chicken, side salad, and hot tea, which he orders by smartphone for pickup while he walks from the subway to the auto dealership. “I like that it’s convenient, trustworthy, and healthy,” he says. “There aren’t many other chains in China like that.” The emphasis on customization and localization ratchets up pressure on Yum to roll out items more quickly. In March the company opened a 27,000-square-foot innovation center in Shanghai. The wealth of data on customer preferences is also pushing Yum’s fast-food brands beyond their comfort zones. Pizza Hut, for example, is revamping its menu to offer more nontraditional items such as steak or pizza topped with Peking duck. Although overall company revenue has grown 25 percent in the past two years and KFC has seen same-store sales increase every quarter since the spinoff, the same metric at Pizza Hut has been declining as it fights rivals for Chinese middle-class diners. Like Starbucks Corp., which is losing sales to an aggressive challenge from local startup Luckin Coffee, Yum China isn’t guaranteed invincibility, despite its current dominance. “Because Chinese consumers are so mobile and used to convenience, they are also more fickle,” says Jason Yu, Shanghai-based general manager of research firm Kantar Worldpanel China. “Loyalty to any chain is fragile.” In 2013 a food safety scare, a bird flu outbreak, and local competition precipitated a twoyear slump for KFC. Yu says Yum’s technological push and data mining can’t hurt. “The fun and efficient customer experience can help attract eyeballs,” he says. “But ultimately it’s health and food safety that makes or breaks a fast-food chain.” �Rachel Chang THE BOTTOM LINE The business that runs KFC, Pizza Hut, and Taco Bell in China is focusing on customization and localization to maintain its market dominance.

Q&A

Glenn Fogel

● CEO of Booking Holdings Inc., whose brands include Agoda, Kayak, and Priceline ● Joined the company in 1999 ● Harvard J.D., 1985; Wharton B.S., 1983 Fogel recently appeared on Businessweek Talks, where he addressed the increasing competition in the $2 trillion global travel industry. Technology is the key to beating rivals, he says, and to bringing Booking’s brands closer together.

① How do you differentiate yourself from the pack?

You’ve got to provide more value, both to the customer who’s going to be traveling and the other side—the host, or the supplier, or the hotel owner. The way you do that is using technology. It’s getting really smart people— AI specialists, people who understand the data—so you can come up with a better solution for both sides of the marketplace.

② Are Google and Facebook your ultimate competitors?

I don’t think anybody can go to sleep and not be concerned about what will Google do next, or Facebook, or Amazon, and that’s just in the U.S. The fact is, though, travel is a lot harder than you think. We have thousands of people, every day, who are calling on hotels to make sure we’re getting the best prices for our customer and working those relationships. That’s not just technology, that’s boots on the ground.

③ How has the travel business changed in the almost two decades you’ve worked in it?

Think about all the troubles you’ve had traveling, about all the problems of booking something, and then something goes wrong. How do you fix it? We are building a frictionless solution. That’s what we want at the end of the day, that you just have to do it once, and it’s done, and if anything goes wrong, there’s somebody who knows everything that happened and can fix it.

● Listen to Bloomberg Businessweek with Carol Massar and Jason Kelly weekdays 2-5 ET on Bloomberg Radio

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Edited by Jeff Muskus and Jillian Ward

Bloomberg Businessweek

rch 25, 2019

The Big Tech

● State and federal officials are exploring antitrust actions against Google and others. They’re short on consensus Last September, Jeff Sessions, then the U.S. attorney general, called a meeting of state attorneys general to discuss his suspicions that Google and Facebook were suppressing conservative views. After hearing him out, the state officials argued that the real problem was Silicon Valley’s market power and its handling of personal data, and they made the case for aggressive antitrust action, according to three people familiar with the event who spoke on condition of anonymity because the discussions were private. Concern about Big Tech had already been mounting in statehouses, but Sessions’s face-toface meeting created its own momentum. During the meeting, Makan Delrahim, the head of the antitrust division at the U.S. Department of Justice, suggested that attorneys general form a group and come back for further planning, according to a person who attended the meeting. In the weeks that followed, the National Association of Attorneys General (NAAG) formed a task force to look into issues in the technology industry, although the plan to follow up with the Justice Department ended after Sessions stepped down in November. Separately, a smaller group of state AGs has begun investigating possible antitrust or consumer protection violations by Google Inc. in particular, say people familiar with the matter. It’s not yet clear whether this preliminary effort, which has not been publicly disclosed, will develop into legal action. But it marks the most significant step state

officials have taken toward a coordinated antitrust action against the technology industry since the federal government and a large group of states sued Microsoft Corp. in the late 1990s. “Privacy and security are built into all of our products, and we will continue to engage constructively with state Attorneys General on policy issues,” a Google spokeswoman said in a statement. The developing action on the state level contributes to a threatening, if muddled, political landscape for Big Tech. Five of the six most valuable companies in the S&P 500 are now technology companies, with a combined market value of almost $4 trillion. This concentration of economic power, combined with numerous controversies over privacy and content moderation, have led to broad calls for government action. The March 15 killings of more than 50 people at mosques in New Zealand again drew scrutiny to tech platforms after the alleged shooter, an avowed white supremacist, posted a manifesto online and streamed the shootings live on Facebook. (Human and automated filters at YouTube and other sites struggled to keep up with millions of reposted versions of the video.) But as Sessions’s meeting illustrated, there’s more agreement that a problem exists than there is around its exact nature, what should be done about it, or who should be in charge. The fault lines on tech don’t always follow traditional party lines. When he still worked for Donald Trump, Steve Bannon suggested that companies such as Facebook and Google were effectively public utilities and should be regulated as such. Democratic Senator Elizabeth Warren of Massachusetts announced a sweeping legislative regulatory plan on March 8, based on the same idea. The response from Democrats was mixed. When Facebook temporarily removed

ILLUSTRATION BY NEJC PRAH

◼ TECHNOLOGY

Bloomberg Businessweek

ads promoting this idea from its social network, Republican Senator Ted Cruz of Texas came to Warren’s defense on Twitter. “First time I’ve ever retweeted @ewarren,” wrote Cruz, who has used his time in congressional hearings to complain about the sort of stuff that comes up when he types his own name into Google. “But she’s right—Big Tech has way too much power to silence Free Speech.” One of tech’s most aggressive GOP antagonists has been Josh Hawley, a Republican who served as attorney general of Missouri until he joined the U.S. Senate in January. In late 2017, Hawley announced that he’d launched an investigation of Alphabet Inc., Google’s parent company, for potential antitrust and privacy violations. His office subpoenaed the company and promised to reach a decision about whether to bring a lawsuit by summer 2018. It later opened a similar investigation into Facebook. By that time, Hawley was deeply engaged in his bid for the U.S. Senate. His successor in Missouri, Eric Schmitt, declined through a spokesman to comment on whether he’ll pursue the issue. In January, Hawley said he’d like to work with Democratic Representative Alexandria OcasioCortez of New York on a bipartisan probe into tech issues. He’s also bemoaned the passive approach of federal regulators. “Any robust definition of consumer welfare must acknowledge that these companies have harmed consumers by conditioning participation in the modern public square on giving away enormous—and growing—amounts of personal information and by leveraging scale to cripple emerging competitors in their infancy,” he wrote in a March 11 letter to the Federal Trade Commission. “Yet the approach the FTC has taken to these issues has been largely toothless.” The FTC said it had received the letter but declined to comment further.

An emerging leader among the state officials is Nebraska’s attorney general, Doug Peterson. He attended the meeting last fall, and in an interview with Bloomberg Businessweek earlier this month, said he was “carrying the ball” for attorneys general concerned about privacy and market power. But Peterson also suggested that the work was in its early stages. “The topic is deep and complex, and so we’re learning,” he says. When asked about the group investigating Google, he declined to comment further. People familiar with the states’ interest in the tech industry say that impatience with federal efforts may push the group toward action. But those involved also realize how big a fight they’d be picking. It’s possible states will encourage federal regulators to take the lead or shy away from the issue altogether. State attorneys general met earlier this month in Washington at NAAG’s annual meeting. They’ll return later this month for the American Bar Association’s spring meeting on antitrust, which begins on March 26. That same week, the FTC will hold a two-day hearing in which technological change, privacy, and competition are among the major slated topics. Antitrust experts say the chances of a serious lawsuit against a technology company seem to be increasing. But some of them also acknowledge that they’ve been anticipating the next big legal battle ever since the FTC ended its antitrust investigation into Google in 2013. “A platform is going to be a defendant in a big case,” says Chris Sager, a law professor at Cleveland State University. “It’s felt that way for five years.” �Joshua Brustein and Peter Robison, with Chibuike Oguh and David McLaughlin THE BOTTOM LINE Frustrated by federal inaction, U.S. state attorneys general are considering taking the lead in the fight to curb the power of Google and Facebook.

March 25, 201

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“First time I’ve ever retweeted @ewarren. But she’s right—Big Tech has way too much power”

 TECHNOLOGY

Bloomberg Businessweek

March 25, 2019

Trump’s CTO Nominee vs. China ○ A former Peter Thiel deputy has won over some industry skeptics. Mobilizing for AI and 5G will be tougher

Since its creation in 2009, the CTO position has had a nonpartisan aura. In addition to Chopra, Obama named a chief information officer and a chief performance officer, announcing that the three roles would “give all Americans a voice in their government and ensure that they know exactly how we’re spending their money.” Under Trump, the job of modernizing government has mostly been transferred to the Office of American Innovation, headed by his son-in-law, Jared Kushner, and the U.S. Digital Service, run by former Google engineer Matt Cutts. Kratsios sees himself as having more of a policymaking role. His goal, as he describes it, is “to take the president’s message and map it to a tech agenda.” He’s been trying to devise policies to counter Made in China 2025, the Chinese government’s plan to develop the world’s top AI and 5G technologies. In February, Trump signed an executive order on AI that, among other things, directs government agencies to release data sets that scientists and private companies might be able to use to train machines. “They have CCTV cameras on every corner and funnel that data into private AI companies,” Kratsios says of China. “That doesn’t mean we don’t have data sets that are extraordinarily valuable.” One possibility, which the Trump administration is exploring, is to share anonymized health records that have been stripped of identifying information with medical researchers, including records maintained by the Department of Veterans Affairs. Kratsios says that could help AI and biotech startups train their software to discover new drugs and gene therapies. Even so, any government promotion of AI will heighten privacy concerns. Kratsios says the White House will protect privacy, and Chopra expects that the Trump administration will enact rules in keeping with the spirit of the Obama administration’s proposed internet Bill of Rights. “We are ultimately reaching a consensus on these issues,” Chopra says. Kratsios seems to enjoy playing the role of the moderate, even when it contradicts others in Trump’s camp. In March the president’s reelection campaign proposed the creation of a government-run wholesale market for 5G internet

○ Kratsios

MICHAEL BROCHSTEIN/AP IMAGES

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For the first time in two years the U.S. is set to have a chief technology officer. On March 21 President Trump will nominate for the post Michael Kratsios, a former venture capitalist who now serves as deputy CTO, a White House official tells Bloomberg Businessweek. Kratsios is just 32, but he’s exceedingly wellconnected, having worked as chief of staff at investment management firm Thiel Capital before joining Trump’s transition team in late 2016. The firm’s namesake, archconservative-by-Valley-standards Peter Thiel, had broken with the technology industry by endorsing Trump and then helping with the transition. After the inauguration, Thiel kept his day job as an investor, but Kratsios was named deputy CTO, becoming Trump’s de facto head of tech policy while the top job went unfilled. Kratsios has spent the past couple years in the somewhat uncomfortable position of fashioning tech policy for a president who doesn’t use email and has expressed open hostility to the biggest tech companies and to technology generally. Trump has loudly criticized Amazon.com, Facebook, and Google. Yet even some of the president’s critics say they’ve been encouraged by Kratsios’s record as deputy. “It gives me some hope,” says Aneesh Chopra, a Democrat who under President Obama was the nation’s first CTO. “I’ve had no conversations with him that make me think he’s partisan.” And while they may not like Trump’s barbs, they’ve welcomed his orders calling for national action to develop technology, including artificial intelligence and superfast 5G wireless networks. “These initiatives will ensure the U.S. continues to grow and thrive,” says Microsoft Chief Executive Officer Satya Nadella, who earlier in the year described Trump’s separation of immigrant children from their parents as “abhorrent.” Skeptics have said the administration’s grand tech proclamations have so far gone largely unmatched by policy prescriptions or budget appropriations. They’ve also used Kratsios’s youth and Trump’s failure to nominate a head of the Office of Science and Technology Policy until August as evidence of an indifference to the sciences, something the White House disputes.

◼ TECHNOLOGY

Bloomberg Businessweek

access, which some in the telecom industry regard as tantamount to nationalization. Kratsios rejects that idea. “We firmly believe in the free-market approach,” he says. “That is the stance of this White House.” The Trump 2020 campaign has since backtracked. �Max Chafkin

than DRAM. The product, which went on sale at the end of last year, will require more investment in manufacturing before the company can mass-produce it. But it’s been tested successfully by Alibaba Group Holdings Ltd. and Google’s cloud division, according to the companies. “There are a lot of operations where you benefit from having all the data accessible to one processor,” says Google product manager Paul Nash. “We think it is going to be commercially viable in a few quarters’ time.” Alibaba used the technology to support its massive Singles Day sales. Still, memory chips tend to be the most volatile slice of the $470 billion semiconductor industry. Only the Paranoid Survive, a seminal Silicon Valley history written by Intel co-founder Andy Grove, spends a great deal of time arguing that it was smart to get out of memory in the Reagan era. In some ways, the company’s efforts to figure out the market still seem like a work in progress: Intel posted a $5 million operating loss in the NAND business last year, on $4.3 billion in revenue. Intel as a whole hit a record $71 billion in revenue during that period, but it’s facing new obstacles at a pivotal moment. Delays in the rollout of manufacturing updates have undermined the company’s lead in chipmaking technology for the first time in decades, and there’s growing evidence that some of its biggest, most reliable customers are considering doing business with cheaper competitors or making their own chips. Cloud leader Amazon.com Inc., which uses a staggering number of server chips, in November unveiled a service based on its homegrown Graviton chips, saying the product would come with a “significantly lower cost.” While he’s an experienced chief financial officer, Swan has been at Intel only since 2016, and during his six months as interim CEO he repeatedly said he didn’t want the top job permanently. Now that he has it, he’s picking up the pursuit of memory from his predecessor, Brian Krzanich, who was ousted in 2018 for a years-earlier affair with a subordinate. Some investors had hoped Swan’s background in finance would mean he’d cut back on riskier bets in favor of more stable businesses. Intel says data-center operators spend about $15 billion a year on DRAM that would be better spent on Optane chips. And in Swan’s reckoning, the only thing holding back Intel’s memory-chip numbers recently has been all the money it’s been spending to develop Optane. “The difference over the next couple of years,” he says, “is we’ll have returns coming in.” We’ll remember he said that. �Ian King

THE BOTTOM LINE Kratsios, previously the tech chief by default, has his fans among Obama-era officials but isn’t planning to mobilize U.S. industry the way his Chinese counterparts have.

Intel’s Short Memory

COURTESY INTEL

● The company’s renewed bet on a volatile business has disappointed analysts who wanted a fresh look from its new CEO

It can be tough to recall that Intel Corp. invented the memory-chip business half a century ago. It gave up on the field for more than a decade, starting in the 1980s, and has struggled since returning in 2006 to match the success of Samsung Electronics Co. in the historically low-margin product category. The bigger issue for Intel, however, is that memorychip technology hasn’t been advancing as quickly as more profitable gear. The limitations of memory chips are starting to lessen the value customers see in buying, say, Intel’s lucrative server chips, threatening a central profit center. That’s why Bob Swan, Intel’s chief executive officer since late January, is sticking with his predecessor’s push into a new kind of chip, called Optane, which the company says doesn’t have the weaknesses of existing technology. According to Swan, Optane represents an evolution serious enough to keep pace with leaps that Intel has made in the data-center gear its biggest customers buy. “We think we have something special,” he says. Analysts are skeptical, given Intel’s checkered history with memory chips. “In what was at one point the best market in history, they were losing money,” says Stacy Rasgon, an analyst at Sanford C. Bernstein. Swan says the ledger will start looking better soon. There are two basic types of memory chip, each with different advantages. DRAM (dynamic random-access memory) chips read and write data quickly but can’t store it when a system is powered down; NAND (short for “not and”) flash memory chips are basically the opposite in how they function. Intel says Optane chips can permanently store data and read and write it faster than NAND, if not faster

THE BOTTOM LINE Intel CEO Swan is wagering that a deeper push into a low-margin business with the new Optane chip will help the company’s more profitable operations.

March 25, 2019

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▲ Intel’s Optane chip

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Bloomberg Businessweek

March 25, 2019

PHOTO ILLUSTRATION BY 731; PHOTO: NIDAY PICTURE LIBRARY/ALAMY

The Outlook For Europe’s Banks ● The proposed Deutsche merger with Commerzbank is just the start of a long, painful process for Europe The world’s largest money manager has a stark warning: More than a decade after the global financial crisis, European banks still face a long and tortuous path to recovery. “Europe is in the midst of a painful, painful transition,” Philipp Hildebrand, vice chairman of BlackRock Inc., said on Bloomberg TV. “I would expect it to entail significant changes in the way banks operate, in their business models, and it will take time.” Until then,

he said, investors will probably steer clear. That the region’s financial institutions, including some of the biggest, are in a state of grinding decline is a grave cause for concern—and not just for their stockholders and bondholders. Europe relies heavily on its lenders to fuel growth. Banks provide about three-quarters of financing to companies and nine-tenths of credit to households. In the U.S., corporations rely on capital markets—selling bonds and shares—for the bulk of their financing. Indeed, part of the pressure on Deutsche Bank AG and Commerzbank AG to consider a merger came from parts of the German government that very much want a healthy national financial champion to help accelerate the country’s

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Edited by Howard Chua-Eoan and Pat Regnier

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Bloomberg Businessweek

March 25, 2019

flagging growth. But there’s no easy fix. Both banks are struggling with their own overhauls, and even if they can manage the tens of thousands of job cuts that would likely come with a marriage, it’s not clear that a bigger entity would be significantly stronger. With economic expansion sputtering not only in Germany but also across the European continent, time may be running out for banks to heal themselves. Another recession would complicate their turnarounds. At the heart of the difficulties are weak balance sheets and modest profitability. Many banks are still just barely able to cover their cost of equity— that is, what investors seek as compensation for companies’ perceived risk. Nowhere is this lack of confidence more visible than in stock valuations. Since January 2018, when shares touched a two-year high, the benchmark STOXX 600 Banks Price Index has dropped about 26 percent. European banks are worth just a quarter of their peak value, reached in 2007. By comparison, U.S. banks have rebounded from the abyss and by early 2018 had recovered almost all of their post-crisis losses, with profits reaching a record last year. As measured by return on equity, profitability stands at about 9.5 percent in Europe. In the U.S. it’s closer to 12 percent. European banks have bolstered their balance sheets, offloaded toxic assets, and retreated to core activities and geographies after the threats to their survival unleashed by the financial and subsequent sovereign debt crises. Nudged by more stringent regulation, they’ve also adopted more prudent lending and trading practices. But investors are hardly pricing that in. Banks on average trade at 20 percent below their book value, with a huge divergence that sees some of the biggest companies—that’s you, Deutsche Bank—trade at discounts of as much as 75 percent. By contrast, U.S. banks are valued significantly more highly by investors, at a 40 percent premium to book value, according to Bloomberg Intelligence. While leaders of European banks can do more to address their institutions’ weaknesses to revive profitability, they’re stuck in a quicksand of low interest rates and rising costs. Regulation is forcing banks to hold more funds to help cushion potential losses in the event of crises, and investment needed to tighten controls and upgrade antiquated technology is pushing expenses higher. Meantime, competition from financial-technology upstarts is forcing banks to spend more on innovation and chipping away at fees they can charge on payments such as international cash transfers, all of which is eroding margins. What’s more, the region’s failure to complete

its vision for a single, Europe-wide financialservices market—the so-called banking union—has left in place obstacles that make it almost impossible for banks to grow outside their home markets. Instead, rising national interests have led to a splintering of Europe. Britain’s decision to leave the European Union will add further barriers and exacerbate the fragmentation of capital markets. The future looks bleak. After the financial crisis, Europe and the U.S. set off on divergent courses. While the federal government swept in to recapitalize America’s biggest banks in 2008, getting them to write off their toxic assets sooner, Europe stopped short of forcing the broader industry to reboot, instead salvaging individual lenders that were on the verge of collapse. Seeking state backing carried a stigma of desperation that European lenders sought to avoid. They resorted to raising capital piecemeal and to modest reorganization. Armed with stronger balance sheets, U.S. banks quickly recovered, while in 2011, when Europe was hit by another crisis, it became apparent that its lenders still needed fixing. As Cyprus, Greece, Ireland, Portugal, and Spain requested international aid—in part to prop up their financial industries—calls for capital injections to mimic what the U.S. had done weren’t heeded. Lenders in some of the bigger economies, such as Italy and Germany, were left largely to muddle through. “Europe’s big problem was that it reacted very slowly to the crises, taking small steps ex post each time and never taking ex ante resolute action,” says Dante Roscini, a Harvard Business School professor. In the end, banks across the euro zone did get

○ Draghi

Investors Are Skeptical of Europe’s Banks STOXX 600 Banks Price Index

Price-book value ratio European banks 180

0.8

150

U.S. banks

1.4 120 3/19/2018

3/19/2019 DATA: COMPILED BY BLOOMBERG

JASPER JUINEN/BLOOMBERG

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 FINANCE

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Bloomberg Businessweek

some help, but it was in the form of cheap loans from the European Central Bank—€700 billion ($795 billion)—and quantitative easing through the ECB’s purchase of €2.6 trillion in corporate and sovereign bonds. While that helped push up asset prices, improving bank balance sheets and bolstering confidence, it also encouraged banks to buy more of their own nations’ sovereign debt. That fueled a so-called doom loop that potentially reduces lending, undermining the economy, and adds to both bank and government weakness. Since 2014 the ECB has also maintained negative interest rates, which have turned the bread and butter of the euro zone’s banks rancid. Among the bigger European lenders, the average net interest margin—the difference between the interest they receive on loans and what they pay out on deposits, adjusted for assets—is about 1.6 percent, less than half of the 3.3 percent enjoyed by the top U.S. banks, Bloomberg Intelligence data show. Banks in the 19 countries that use the euro have to pay 0.4 percent interest on the €2 trillion they park with the ECB, costing them about €8 billion every year, according to a recent research paper by Deutsche Bank. ECB President Mario Draghi has signaled that low interest rates are here to stay. As he cut the growth forecast for the euro zone from 1.7 percent to 1.1 percent for 2019, Draghi pledged that rates will stay at the current record-low levels at least through the end of the year, pushing back the outlook for faster economic growth. “There is no end in sight to banks’ profit squeeze,” says Peter Hahn, a dean at the London Institute of Banking & Finance. Just four months ago, the expectation that interest rates would rise helped lure Doug Braunstein, a former chief financial officer at JPMorgan Chase & Co., to Deutsche Bank stock. In announcing he’d bought a 3 percent stake in the bank in November, he pointed to the “significant upside” to earnings for the private and commercial bank from rising interest rates. Deutsche and Commerzbank are holding exploratory talks to create Europe’s fourth-largest financial institution, with a €1.8 trillion balance sheet. The thinking is that by removing overlaps at home through job reductions, the deal will also lower the banks’ overall funding expenses. The combined businesses will see profitability rise, and the bigger company could also compete more effectively with other global banks in securities trading. A combined bank would still have to cope with Europe’s structural inefficiencies. More than 6,200 banks operate across the EU. While that’s down from 8,500 in 2008, the market remains

deeply fragmented. In Germany, the top five institutions hold about 30 percent of the banking assets; in the U.S., the figure is more than 65 percent. A merger would leave Deutsche Bank and Commerzbank with just a 10 percent to 15 percent market share, giving them little pricing power in a cutthroat sector. Hundreds of Germany’s publicsector savings banks and cooperative lenders compete with commercial lenders on unequal terms, because they’re not as driven by profitability. While a single supervisor, the ECB, oversees the biggest lenders, smaller ones are regulated by national agencies, adding to inconsistencies. The absence of a truly single European market will continue to hinder cross-border combinations, too. Lenders can’t make the most of expanding outside their home markets, because they can’t move funds around freely. Even across the euro zone, countries still run individual deposit insurance programs. National interests hinder progress. Some government officials are resisting efforts to create a Europe-wide agency to help detect and prevent dirty money flows, despite the obvious need. In September, Denmark’s Danske Bank AS reported it had moved about $230 billion, much of it suspicious, through its Estonia unit. Since then more than half a dozen European lenders have faced allegations of money laundering either as the prime lender or as correspondent banks. The European Commission, the executive branch of the EU, has proposed giving more power to the European Banking Authority, but national judiciaries would probably still need to be the enforcers. Other structural weaknesses abound. The average European bank has sovereign debt exposure equal to 170 percent of its core Tier 1 capital, more than triple the exposure of U.S. banks, according to Deutsche Bank analysts. What’s more, about 60 percent of an average European bank’s sovereign holdings are of their home government’s debt, the research shows. That’s because, for now, sovereign debt on banks’ books still carries a zero risk weighting, meaning it doesn’t count in calculations of how much capital they must hold. While choking under the weight of bad loans, Italian banks used much of the stimulus funding from the ECB to buy sovereign debt rather than boost lending in the recession-hit economy. As things stand, bad loans still make up more than 10 percent of total loans, and Italy slipped back into recession last year. The ECB’s efforts to revive the euro zone’s economies by keeping rates low isn’t working, says Harvard Business School’s Roscini. “Instead of

March 25, 2019

● ECB growth forecast for the euro zone in 2019

1.1%

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March 25, 2019

prompting businesses and households to borrow, negative interest rates over a long period create a sense of anxiety,” he says. “Banks need more profitability to take on more credit risk. Europe is beginning to look ever more like Japan.” That’s a grim description: Declining margins have left many of Japan’s lenders limping for two decades now. �Elisa Martinuzzi, Bloomberg Opinion

private equity. Unlike owning stocks and bonds, investing in private equity funds means holding illiquid stakes in companies that may take years to realize their value. In theory, such investments can play to the advantage of CalPERS as a very longterm investor. Money managers who ignore their institution’s innate strengths and weaknesses, he says, “are the profit center for the other people.” But CalPERS also faces private equity capacity constraints—it may have more money than it can profitably invest. Its $45 billion allocated to private equity includes $17 billion in uncommitted capital. It needs to place $10 billion a year just to keep up with growth and replace funds that have reached the end of their investment terms. And it’s competing for deals as the private equity industry’s dry powder—money it hasn’t invested yet—climbed to a record $1.2 trillion at the end of 2018, according to Preqin Ltd. That’s a sign that private equity, too, may not offer the bargains it once did. Meng is exploring a range of options to find opportunities, including creating funds to buy late-stage startups and other companies CalPERS could hold for the long term, competing head-tohead with some of the pension’s longtime partners, such as Schwarzman’s Blackstone. He says he’ll need five years to hire the investing talent and change the culture at CalPERS to implement his vision. “For the investment portfolio to show the effect, it may have to take 10 years,” he says. He passed his first political hurdle on March 18, when the board endorsed his plan to invest $20 billion in startups and long-term company holdings. “It may or may not work now,” he told the board. “We will not know if we don’t try. And in this challenging capital market environment, we owe it to all our stakeholders to explore all the options available.” Skeptics, including State Controller Betty Yee, a CalPERS board member, questioned whether it’s a good idea. “We’re taking on a larger risk for a future benefit that likely will not move the needle,” said Yee, who voted against the plan. Meng was born in the Chinese port city of Dalian, the youngest of two sons of an engineer and a history teacher. It was 1970, a year before President Richard Nixon reopened U.S.China relations and almost a decade before Deng Xiaoping began reforms that launched China’s transformation into a global economic superpower. “If I were born 20 years earlier, I wouldn’t have had the opportunity to leave China and go to the U.S.,” he says. “I was born in an era when you didn’t have to be from a rich family to be successful.” He came to the U.S. in 1995 for a Ph.D. program in civil engineering at the University of California

● CalPERS investments

How Fast Can $360 Billion Grow? ● The new boss at CalPERS used to deal in trillions of yuan. This challenge may be bigger

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In January, Ben Meng started his job as chief investment officer of a seriously big fund: the $358.4 billion California Public Employees’ Retirement System, or CalPERS, the largest U.S. pension. But neither the scale nor the political spotlight that comes with the role seem likely to intimidate him. For the last three years, he was deputy CIO at the State Administration of Foreign Exchange (SAFE), the tightly controlled $3 trillion reserve fund in China. “It’s not often that an individual has the opportunity to hold key roles for two of the largest pools of capital in the world,” wrote Stephen Schwarzman, chief executive officer of private equity giant Blackstone Group LP, in an email. Perhaps more daunting for Meng is this figure: 7 percent. That’s CalPERS’s annual return target. It may not sound very high given that the S&P 500 returned almost an annualized 11 percent in the five years through January 2018. But CalPERS made only an annualized 6.3 percent in that period. And deep into both a bull market and economic expansion, there may not be a lot of easy gains to be made from here. The stakes for CalPERS are high, since missing the mark too widely endangers retirement payments for its 1.9 million members. “We need to do things differently,” says Meng in his Sacramento office. The walls are still bare, and the furniture arrangement is in flux as he tries to find a place where the sun’s glare won’t hit his computer screen. Meng’s plans to improve returns hinge on

Bonds $97b

Real estate $34.1b

Private equity $27.8b

Infrastructure and forestland $5.9b Inflation-linked assets $4.2b Cash and other $8.5b

PHOTOGRAPH BY CARLOS CHAVARRIA FOR BLOOMBERG BUSINESSWEEK; DATA: CALPERS, AS OF JAN. 31

THE BOTTOM LINE Europe is even more dependent on strong banks to fuel its economy than the U.S. Yet the continent’s lenders can’t seem to find healthy profits.

Stocks $173.6b

◼ FINANCE

at Davis. His new California friends were all buying stocks, making a bundle on the dot-com bubble, so he opened an E*Trade account, bought tech stocks, and watched the money grow. He enjoyed investing so much that he enrolled in a new financial engineering program at UC-Berkeley. To pay tuition, he sold his stocks—just before the market crashed. “Dumb luck,” he says. “I didn’t know the difference between alpha and beta.” That’s investment jargon for beating the market and tracking it, respectively. “I didn’t know about bonds,” he adds. After earning his financial engineering degree in 2002, he worked at Morgan Stanley, Lehman Brothers, and Barclays Global Investors. Then he joined CalPERS in 2008, when the financial crisis sent the fund plunging 24 percent. He focused on a variety of investment areas, helping CalPERS dig out of its hole. He became a U.S. citizen in 2010. In 2015 he took the job in China to broaden his work experience, he says, but also to be close to his recently widowed mother, who still lives in Dalian with his brother. Meng says he’s not permitted to go into detail about his work at SAFE, where he advised the CIO through last year. “They manage the foreign exchange reserves for China, so that’s an even bigger challenge than CalPERS,” says William Overholt, a senior research fellow and China specialist at Harvard’s Kennedy School of Government. The reserves include international currencies (mostly U.S. dollars), gold, and other foreign exchange assets, according to SAFE’s website. Overholt says SAFE and the People’s Bank of China, the central bank, are “two entities but closely joined.” China’s exchange rate management—sometimes called “manipulating” by President Donald Trump—is one of the key trade disputes between the world’s two largest economies. Meng declines to wade into a politically charged discussion about U.S.-China relations. He says his big takeaways from SAFE were developing professional relationships and working on a huge scale. “Once you see $3 trillion, to go to $350 billion is helpful,” he says. “When you work in another country, you see things from an entirely different perspective—you’re right there, right in the middle of things.” Having lived outside China for 20 years, Meng says he felt like a visitor when he returned for work. He stayed in touch with his former colleagues at CalPERS, and he applied for the CIO job there as soon as he heard of its opening last year. His return to Sacramento has been easy in some respects, he says. He even moved back into the house he bought in 2012 and never sold, as if he were “maybe subconsciously thinking I was coming back.”

He says he took the CalPERS job for the mission, “to serve those who serve California.” His 2019 maximum pay is $1.7 million, including a performance-based bonus. Amid all the big numbers he manages, Meng sometimes struggles to keep things in perspective. “When I make an investment decision at CalPERS or anywhere, it can easily be a half-billion dollars,” he says. “Then I think about the average retiree making less than $3,000 a month from CalPERS.” Meng tells a story to illustrate how, in money management, nothing is guaranteed. After he got the CalPERS CIO job, his mother was so proud that she opened a brokerage account in China. She would phone her son from China every day to ask if her stocks were going up, and he would reply that he couldn’t be sure. After a while, she stopped calling. “My brother told me she got really worried about what I’m doing,” he says. “How can I manage other people’s retirement money if I can’t even talk to my mother with certainty?” Investors can, at best, learn the odds and play them in their favor, he says. “The market is not an accommodating machine,” he says. “It doesn’t give you 7 percent every year just because you need it.” �John Gittelsohn THE BOTTOM LINE To earn returns high enough to pay California’s public retirement bills, the CIO has plans to find new opportunities in private equity investments.

▲ Meng

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E C O N O M I C S

Edited by Cristina Lindblad

March 25, 2019

A Beginner’s ○ An overview of a once-fringe school of economic thought that’s suddenly of the moment Strong connection Weaker connection

○ Malthus Demand gap ○ Say Supply creates demand

○ Smith

○ Franklin Labor theory of value

Neoclassical ○ Jevons ○ Walras ○ Menger

Keynes’s The General Theory of Employment, Interest and Money created the field of macroeconomics

○ Clark Marginal productivity theory

MMT’s first textbook says that “it is probable” Marx’s theories influenced Keynes

○ Ricardo

There’s a lot of debate swirling around Modern Monetary Theory—some strident. Its critics call it a hot mess. “MMT has constructed such a bizarre, illogical, convoluted way of thinking about macro that it’s almost impervious to attack,” Bentley University economist Scott Sumner claimed recently on his blog. MMT’s proponents say it’s the critics who are impervious to reason—“part of a degenerative paradigm that has lost credibility,” says Australian MMTer William Mitchell. This state of confusion isn’t good because Modern Monetary Theory, once confined to blogs and a handful of colleges including the University of Missouri at Kansas City, suddenly matters. In the U.S., the left wing of the Democratic Party is citing MMT to make the case for massive federal government spending on a Green New Deal to wean the U.S. off fossil fuels and fund Medicare for All. It’s virtually certain that MMT will be dragged into the debates of the 2020 presidential race. So the time is right for a semi-deep dive into Modern Monetary Theory—what it is, where it comes from, its pros and its cons.

○ Marx ry Monetary theory of production, class struggle, crises

○ Marshall

○ Keynes ○ Veblen Monetary theory of production, institutions

Fortunately, the first academic textbook based on the theory was published in February. The 573-page tome, titled simply Macroeconomics, is by Mitchell, an economist at the University of Newcastle in Australia; Randall Wray of Bard College in Annandale-on-Hudson, N.Y.; and Martin Watts, an emeritus professor at Newcastle. This article is based on the textbook as well as academic papers and blogs by MMTers and their critics. A good place to start is with a simple description that you can carry in your pocket: MMT proposes that a country with its own currency, such as the U.S., doesn’t have to worry about accumulating too much debt because it can always print more money to pay interest. So the only constraint on spending is inflation, which can break out if the public and private sectors spend too much at the same time. As long as there are enough workers and equipment to meet growing demand without igniting inflation, the government can spend what it needs to maintain employment and achieve goals such as halting climate change. If you’ve absorbed that much, you’re already

 ECONOMICS

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March 25, 2019

Guide to MMT Austrians ○ Hayek, et al.

○ Pigo ou

Old Keynesians ○ Samuelson ○ Hicks ○ Tobin

○ Mitchell Business cycles ○ Commons Theory of law

○ Sraffa

○ Plosser Real business cycle

Supply siders ○ Mundell, et al.

○ Debreu ○ Arrow ○ Hahn General equilibrium theory Monetarists s ○ Friedman n ○ Greenspan

○ Lucas Rational expectations, new classical

New Keynesians ○ Mankiw ○ Stiglitz ○ Blinder

○ Robinson  ○ Kalecki

Robinson explored how employers could pay workers less than they’re worth

○ Bernanke tary/macro New monetary/macro consensus

Post-Keynesians ○ Minsky  ○ Davidson ○ Kregel

Institutionalists ○ Ayres ○ Dillard ○ Foster

This is the school of thought that predominates in central banks and leading universities

○ Moslerr ○ Mitchel ○ Wray  er ○ Forstatter ○ Kelton  Modern y Monetary Theory

29 “The issuer of a currency faces no financial constraints”

ADAPTED BY BLOOMBERG BUSINESSWEEK FROM MACROECONOMICS, PUBLISHED BY RED GLOBE PRESS

ahead of a lot of the critics. Because MMT is associated with the Left, some people assume it favors soaking the rich to pay for social programs. In fact, MMT breaks with liberal orthodoxy by saying that while taxes on the wealthy are good for lessening inequality, they aren’t essential to pay for government spending. Another misconception is that MMT says deficits never matter. On March 13 the University of Chicago Booth School of Business published a survey of prominent economists that misrepresented MMT that way, leaving out its understanding that too-big deficits can cause excessive inflation. The surveyed professors roundly disagreed with MMT as described. MMTers cried foul. Modern Monetary Theory says the world still hasn’t come to terms with the death of the gold standard in 1971, when President Richard Nixon declared that the dollar was no longer convertible into gold. In the modern era of “fiat” currency, MMT says, the U.S. and other big economies no longer need to worry about having enough gold to back their paper money, so they’re free to print however much they need.

MMT claims to be the legitimate heir to the theories of Britain’s John Maynard Keynes, who created the field of macroeconomics during the Great Depression. Keynes coined the term “paradox of thrift.” His insight was that while any single household can dig itself out of a hole by cutting spending when its income falls, the economy as a whole cannot. One household’s spending is another’s income, so if everybody cuts back, no one gets paid. What you get then is a depression—a situation only government can fix because, unlike the private sector, it can afford to spend freely, putting money in people’s pockets and thus getting the economy back on track. In MMT’s reckoning, Keynesianism was gutted in the following decades by successors such as Paul Samuelson, who unrealistically tried to make economics like physics, playing down the role of fundamental uncertainty. MMTers haven’t endeared themselves to the mainstream by referring to that school of thought as “bastard Keynesianism,” a coinage of the late British economist Joan Robinson. MMT also draws on the “functional finance” work of the Russian-born British economist Abba

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Lerner, who wrote in the 1940s that government should spend what’s required to achieve its goals, deficits be damned. Later, Britain’s Wynne Godley developed the concept of sectoral balances, which focuses on the accounting truth that when the government runs a deficit, the nongovernment sector must run a surplus, and vice versa. Starting in the 1990s, the budding movement coalesced with the financial and intellectual support of Warren Mosler, a hedge fund manager who lives in the U.S. Virgin Islands and has interests ranging from politics to catamaran design. It ran into skepticism. When Mitchell presented the ideas at an economic conference, he recalls, the first comment was from a man who said, “I think we are being visited by a presence from Mars today.” MMT rejects the modern consensus that economies should be steered primarily by the raising and lowering of interest rates. MMTers believe that the natural rate of interest in a world of fiat money is zero and that pegging it higher is a giveaway to the investor class. They say tweaking interest rates is ineffectual because businesses make investment decisions based on prospects for growth, not the cost of money. MMTers argue that economies should be guided by fiscal policy—government spending and taxation. They want a nation’s central bank to do the bidding of its treasury. So when the treasury needs money, the central bank accommodates it with a keystroke—creating base money from thin air by crediting the treasury’s checking account. The new textbook says that today, governments “tend to run unduly restrictive fiscal policy stances so as not to contradict the monetary policy stance.” MMT says that, contrary to appearances, banks don’t make loans out of deposits. Rather, they make loans based on the demand for borrowing, then the borrowers stash the proceeds in the bank. Anyone they write a check to simply makes a deposit in another bank. The bottom line is that loans create deposits rather than deposits creating loans. This is one aspect of MMT that even some conservative central bankers—including those at Germany’s Bundesbank—agree with. To stabilize employment, MMT would add a federally funded, locally administered job guarantee. Government would employ more people in slumps than in booms. Pavlina Tcherneva of Bard College’s Levy Economics Institute is refining the plan. Representative Alexandria OcasioCortez, the Democratic Socialist from the Bronx who’s in her first term in Congress, supports the job guarantee and says MMT should be “a larger part of our conversation.”

MMT challenges a core principle of conventional economics, which is that an increase in budget deficits will tend to raise interest rates, all else equal. Just the opposite, it says, sounding a bit like the White Queen from Alice in Wonderland. When the government spends more, the private sector gets the money and puts it in the banking system. With more money in the system and no increase in demand for it, interest rates will tend to fall, not rise, MMT says. That is, unless the government chooses to soak up reserves by selling bonds, which it doesn’t have to do. The reason the government doesn’t need to sell treasury securities, or levy taxes, to spend money is that the central bank, under the control of the treasury, can pay for everything by conjuring up electronic money. In MMT’s ideal world there would still be taxes, but their main purpose, aside from lessening inequality, would be as “offsets” to keep inflation under control. Taxes would drain just enough money from consumers and businesses so total spending in the economy won’t be excessive. It’s tempting to view MMT’s conception of fiscal policy as essentially similar to that of the mainstream—“Hey, they believe in taxes, too!”— but that’s not quite right. MMTers hold that inflation isn’t primarily the result of excessively strong growth. They blame much of it on businesses’ excessive pricing power. So before trying to choke off growth to kill inflation, they would try to break up monopolies and stop banks from making too many loans. “The more actively we regulate big business for public purpose, the tighter the full employment we can achieve,” three MMTers wrote in a letter to the Financial Times’ Alphaville column that was published on March 1. With that formula, it’s no wonder that MMT has loud critics on Wall Street, where it’s sometimes derided as Magic Money Tree. What’s more surprising is how much flak the school of thought is taking from liberal economists who’d appear to be natural allies, such as Larry Summers, the former Treasury secretary and former Harvard president. Summers has been making the case that wealthy nations are suffering from “secular stagnation” and require permanently high levels of stimulative deficit spending by governments to keep them out of recession, which is similar to what MMT argues. Yet in a recent Washington Post op-ed, Summers called MMT “fallacious at multiple levels.” Summers and others may be worried that MMT will give a bad name to their more conventionally dovish views on deficits. “As long as they’re out there claiming that standard macroeconomics is all wrong, I guess we need to respond,” Paul

March 25, 2019

“I think we are being visited by a presence from Mars today”

● Cash in circulation plus banks’ reserves in the Federal Reserve $4t

2

0 1/12/00

3/13/19

PREVIOUS SPREAD: SMITH: BRIDGEMAN IMAGES; KEYNES: NORDICPHOTOS/AGEFOTO; MARX: AKG-IMAGES; PIGOU, ROBINSON: ALAMY; FRIEDMAN: ULLSTEIN BILD/GRANGER; GREENSPAN, BERNANKE: COURTESY FEDERAL RESERVE; MINSKY: COURTESY WASHINGTON UNIVERSITY ARCHIVES; WRAY: GABRIELE BARTOLETTI; KELTON: SCOTT MCINTYRE/BLOOMBERG; DATA: FEDERAL RESERVE BANK OF ST. LOUIS ; THIS SPREAD: PHOTOGRAPH: FABRIZIO GIRALDI

◼ ECONOMICS

Bloomberg Businessweek

Krugman, the Nobel laureate who is a professor at City University of New York Graduate Center, wrote on his New York Times blog. MMT’s critics argue that trying to use fiscal policy to steer the economy is a proven failure because Congress and the president rarely act quickly enough to respond to a downturn. And they say politicians can’t be relied upon to impose pain on the public through higher taxes or lower spending to squelch rising inflation. MMTers respond that they also oppose fine-tuning and instead want to use automatic stabilizers—including the jobs guarantee—to keep the economy on track. MMT’s detractors are skeptical of the idea that the treasury and central bank should work in concert. The Federal Reserve did the Treasury Department’s bidding during World War II, but that “overdraft” privilege was used spottily thereafter and permanently ended in 1981—precisely because economists warned that a subservient central bank would allow inflation to race out of control. They’re also dubious of the job guarantee, arguing that if the government’s wage for guaranteed jobs is too low it won’t do much to help unemployed workers or the economy, while if it’s too high it will undermine private employment. Tcherneva’s plan calls for $15 an hour. MMT envisions that governmentemployed workers would move back into the private sector when the economy strengthened, but that means some government functions would no longer be performed. In an email, Wray said the cyclical fluctuations in government employment are manageable. Critics of MMT reject its reassurance that a country with its own currency doesn’t need to worry about deficits. After all, it’s been proven that a nation that loses the confidence of the world’s investors will see its currency plummet. As recently as 1976, the U.K. was forced to appeal to the International Monetary Fund to stabilize the value of sterling. Wray said the U.K.’s mistake was trying to peg its currency to the dollar and the crisis eased when it allowed the pound to float. Other disagreements are harder for laypeople to parse. There are complicated arguments over how interest rates are determined and whether the government and private sectors compete for savings, for example. Mainstream economists argue that the correct parts of MMT aren’t new and the new parts aren’t correct. But MMTers point out that the establishment hasn’t covered itself in glory in recent years—largely failing to foresee the global financial crisis a decade ago, for instance. Paul McCulley, the former chief economist of bond giant Pacific Investment Management Co., says that though he’s

“not a card-carrying MMTer,” he believes it offers a “robust architecture for a fiat currency world.” In any case, the new textbook gives MMT a good slingshot. Samuelson, in the preface to the 1990 edition of his best-selling principles book, wrote, “I don’t care who writes a nation’s laws—or crafts its advanced treaties—if I can write its economics textbooks.” Stephanie Kelton, an MMTer who was the economic adviser on Vermont Independent Senator Bernie Sanders’s presidential campaign in 2016 and is a Bloomberg Opinion columnist, sees the tide turning. In presentations, the Stony Brook University economist likes to flash up a quote that says, essentially: First they ignore you, then they laugh at you, then they fight you. Then you win. �Peter Coy, Katia Dmitrieva, and Matthew Boesler

March 25, 2019

THE BOTTOM LINE Modern Monetary Theory has sparked a heated debate in economic circles about debt and deficits, but many of its proponents say the school of thought is misunderstood.

Italian Boot and Chinese Belt 31

●Trieste is seeking Chinese investment to boost container traffic at its port

More than seven centuries after Marco Polo set off from Venice on a voyage that would culminate at the court of Kublai Khan, the Italian city continues to tout itself as the westernmost point of the ancient Silk Road and China’s gateway into Europe. Now it faces some competition from Trieste, an increasingly busy port city on the northeastern edge of Italy, whose contributions to commerce and culture include popularizing coffee by importing, roasting, and shipping the

▲ The port in Trieste

Bloomberg Businessweek

March 25, 2019

beans northward, to Vienna’s cafes and beyond. Today, Trieste is eagerly preparing to open its port to China as a European point of entry for the “Belt and Road” initiative (BRI), a massive infrastructure spending project designed to bolster sales of Chinese-made goods and services around the world. China and Italy are expected to sign a preliminary agreement in Rome during a state visit by President Xi Jinping scheduled for March 22. Italy will become the 124th nation to join up, but it will be the first in the Group of Seven, in defiance of loud warnings from the U.S.—and more quietly voiced concerns from some quarters of Europe— that BRI is first and foremost a vehicle for Beijing to expand its sphere of influence. As part of a constellation of deals that will be signed on the sidelines during Xi’s visit, Trieste’s port plans to enter its own agreement with Belt and Road’s biggest builder, China Communications Construction Co., or CCCC, according to Zeno D’Agostino, president of the port authority. “Trieste will become Singapore or Hong Kong,” he says optimistically. The city has a long way to go to reach that stature. Greece’s port of Piraeus—whose operator is majority-owned by China’s Cosco Pacific Ltd.—has seven times the cargo traffic (4.9 million containers) as Trieste, which in 2018 handled about 725,000 containers. This is why D’Agostino is seeking Chinese help. A new master plan for the Trieste port has a wish list of €1 billion ($1.14 billion) in improvements that would speed the movement of goods across the Continent. One of them, dubbed Trihub, envisions linking the port with a newly opened freight train line to points north in Germany, as well as upgrading local rail connections that lead to Eastern Europe. The €200 million project is among more than a dozen the European Union put on the table in talks with China last year on the EU-China Connectivity Platform, a Brussels-led initiative. Italy’s attempts to cozy up to Xi, who unveiled Belt and Road in 2013, are drawing rebukes both inside and outside the country. “Endorsing BRI lends legitimacy to China’s predatory approach to investment and will bring no benefits to the Italian people,” the White House’s National Security Council said on March 9 in a Twitter message. Businesses operating in Italy don’t appear to be heeding Washington’s warnings. Recent announcements by TIM SpA (known as Telecom Italia) and Vodafone Group Plc suggest the companies plan to move ahead on partnerships with Huawei Technologies Co. to roll out 5G mobile networks in the country, even as the Trump administration has been pressuring allies to freeze out the

Chinese telecommunications equipment supplier. With outside pressure mounting, members of Italy’s fractured leadership appear to be waking up to the geopolitical implications of the photo op with Xi. On March 11, the Ministry of Economic Development announced there wouldn’t be any pact on 5G technology in paperwork to be signed during Xi’s visit, seeming to bow to critics who objected on national security grounds. Earlier that day, Deputy Premier Matteo Salvini of Italy’s anti-immigrant League party told reporters he doesn’t want “foreign companies colonizing Italy.” What Italy stands to gain from a closer relationship with China is clear. Its sputtering economy slipped into the third recession in a decade at the end of last year. Foreign direct investment amounted to €18.2 billion last year, less than half the €48.1 billion the country logged in 2007, the year before the global financial crisis. Bilateral trade with China totaled €43.9 billion in 2018, equal to 2.5 percent of Italy’s gross domestic product. That’s smaller than the EU’s 3.8 percent or the U.S.’s 3.4 percent, so there’s clearly room for growth. Potential downsides lurk in the details of whatever partnerships bloom, including the prospective relationship between Trieste and CCCC, which for now includes no financial terms or contractual obligations, according to D’Agostino. CCCC has faced allegations of fraud in several of the more than 100 countries in which it’s building roads, ports, bridges, and other projects. The company was blacklisted by the World Bank for eight years, starting in 2009, for alleged fraudulent bidding practices for a Philippine highway; Malaysia halted two rail projects with CCCC last year amid corruption investigations; and Canada blocked it from acquiring a construction company on national security grounds in May. CCCC Chairman Liu Qitao in an interview in September disputed the allegations. D’Agostino insists fears about China are overblown. The paperwork he plans to sign with CCCC isn’t “a concrete agreement,” he says. His goal isn’t bringing in investment so much as bringing in ships. “We want traffic,” he says. Of Italy’s imports by sea, less than 2 percent have come from mainland China in recent years as measured by tonnage, according to EU statistics. At most, D’Agostino sees CCCC taking a 10 percent stake in the Trihub project, the equivalent of €20 million. Says D’Agostino: “People are talking geopolitics. For me, it’s only business.” �Vernon Silver and Sheridan Prasso, with Giovanni Salzano

● Foreign direct investment in Italy

THE BOTTOM LINE Italy defied Brussels and Washington to become the first G-7 nation to join Beijing’s Belt and Road initiative. Infusion of Chinese money may come with strings attached.

€45b 30 15 0 -15 2007

2018

● Trade with China as percent of GDP U.S. EU Italy 4%

2

0 2000

2018

DATA: BANK OF ITALY; DATA: EUROSTAT, INTERNATIONAL MONETARY FUND, BUREAU OF ECONOMIC ANALYSIS

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◼ ECONOMICS

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r ur t n M 2n

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P O L I T I C S

Edited by Jillian Goodman, Dimitra Kessenides, and Stephen Merelman

One British Industry That Isn’t Worried About Brexit  ● Despite scandals and backlash, private prisons are expanding When British prison inspectors appeared unannounced at Her Majesty’s Prison Birmingham, a large private facility in central England, they encountered pools of blood and vomit on the floors. Guards locked themselves in offices to sleep during patrol hours, and inmates wandered the corridors visibly high. At one point the chief inspector, Peter Clarke, became so overcome by drug fumes that he had to leave the housing unit. Earlier that week, his team’s cars had been torched in the secure staff parking lot, according to a letter he wrote to the justice secretary last August. Two weeks after Clarke’s visit, ministers used emergency powers to take control of HMP Birmingham from G4S Plc, the private company that had run it since 2011. Britain holds a greater proportion of its inmates in for-profit prisons than any other country except Australia and does so at twice the rate of the U.S. Almost 20 percent of the 82,000 inmates in England and Wales are housed by three companies: G4S, Serco, and Sodexo. The private sector has an even bigger footprint in Britain’s immigration removal centers and prisoner transport services, and it also runs some of its police cells and probation monitoring. A G4S spokeswoman says the company has “no excuses” for the recent conditions at Birmingham, adding that its four other British prisons perform better. The opposition Labour Party has promised to rein in private prison companies, accusing them of cutting corners to boost earnings. “The incarceration of human beings for profit is immoral,” says Richard Burgon, Labour’s justice spokesman. At least three other smaller opposition parties are also against commercial prisons. Critical politicians point to a string of scandals beyond Birmingham, including the collapse of a major private probations provider, Working Links, in February. A Ministry of Justice report found that Working Links compromised “professional ethics” and falsely assigned the prisoners’ risk statuses to meet targets. Fraud

March 25, 2019

probes into G4S’s and Serco’s electronic-monitoring contracts are under way after a 2013 audit revealed billing for supervising prisoners who had died or left the country. Serco says it has changed internal procedures since the audit. G4S says it’s “cooperating fully” with the investigation. Britain opened its first private prison in 1992, when the country was strengthening police powers and sentencing laws under Conservative Prime Minister John Major (“Society needs to condemn a little more and understand a little less,” Major said in a 1993 interview), a process that continued under his successor, Labour’s Tony Blair. Since then, prisoner numbers in England and Wales (excluding Northern Ireland) have almost doubled. Scotland has followed a similar path, with numbers rising more than 60 percent since 1990, although they’ve recently started declining. In Ireland they’re up about 80 percent in the same period. Overall crime rates have dropped over the past 25 years, yet homicides, stabbings, and robberies are on the rise—a potential major challenge for an already overstretched police and prison service. Last month three teenagers were stabbed to death in Birmingham, part of a spate of knife crimes that police chiefs and politicians have termed a national epidemic. Some take the combination of privatizing and surging inmate numbers as a harbinger of dark days. “The dynamics look eerily similar to the U.S.,” says Michael Jacobson, director of CUNY’s Institute for State and Local Governance and a former New York City corrections commissioner. The U.S. has the highest total incarceration rate in the world, far outstripping both the U.K. and Australia. “We have seen the movie here, and it does not end well,” he says. In the five years from 2014 through 2018 alone, serious assaults in English and Welsh prisons have increased 130 percent, while self-harm incidents have almost doubled. Privatization proponents say for-profit companies still have a lot to offer. Prisons Minister Rory Stewart declined to be interviewed but wrote in an email that both public and private prisons face problems and that the private sector has “played an important role” in the justice system, which he vowed would continue. Stewart, a former aid minister and founder of a nongovernmental organization in Afghanistan, told members of Parliament last year that he’d like to see prisoner numbers fall in the U.K. but that it’s unlikely to happen in the near term. Craig Thomson, a former Scottish public prison director who now manages Serco’s Thameside prison in south London, says he was won over by the private sector’s approach. Without the “red

PHOTOGRAPH BY KALPESH LATHIGRA FOR BLOOMBERG BUSINESSWEEK

Bloomberg Businessweek

Her Majesty’s Prison Thameside in south London, run by Serco

The inside of Thameside

election in 2022—or sooner, as Brexit continues to bedevil May’s Conservative government. Marcus De Ville, Serco’s spokesman, says Labour’s warning isn’t on the company’s “immediate radar” but adds that if Britain stops contracting with Serco, it will look for more business abroad, particularly in Australia. Meanwhile, HMP Birmingham’s future remains uncertain. Parliament is still trying to determine what went wrong, but a previous investigation following a 2016 riot there uncovered “chronic staffing shortages” and prisoners who were “policing themselves.” G4S developed a plan to improve security following the disturbance. Opposition MPs are now calling for companies to make private prison staff numbers public. The public prison service already reports its staffing, but the three private operators have resisted, arguing that it’s a commercially sensitive matter. This summer the British government will review whether to return control of the prison to G4S. Liz Saville Roberts, an opposition MP and co-chair of a parliamentary group representing prison officers, says the lack of transparency hinders politicians from scrutinizing how private companies run their prisons. “We need to identify whether there was something happening in Birmingham that could be waiting to happen in other private prisons,” she says. �Joshua Jacobs THE BOTTOM LINE Labour has vowed to end private prison contracts if it retakes Parliament. In the meantime the industry is thriving, thanks to supportive ministers.

● Share of prisoners in private prisons Australia 18.4% England and Wales 17.8 Scotland 15.0 New Zealand 9.7 U.S. 8.5

● Annual assaults in prisons, England and Wales ◼ Serious assaults on staff ◼ Serious prisoner-onprisoner assaults 4k

2

0 2010

2018

DATA: GOVERNMENT REPORTS, U.K. MINISTRY OF JUSTICE

36

tape” generated by government management, Thameside operates with about half the staff of a comparable public institution, he says, and spends more of its budget on facilities, including a wellequipped gym and in-cell computers. On a recent day there even the inmates seemed satisfied, and several said they prefer Thameside to London’s older public prisons. “If Serco is making a small margin and is still cheaper” than the government, says Thomson, “what’s wrong with that?” Last year, Stewart announced plans to build six more facilities that will accommodate as many as 10,000 prisoners. Reaffirming his commitment to privatization, he told Parliament that for-profit companies will compete to run the prisons and that the public prison service would manage them only if no company provides an adequate proposal. The first two facilities, scheduled to open within the next three years, will be privately run, Stewart confirmed in November. Julian Le Vay, the former finance director of Britain’s prison service, calculates that new prison contracts could be worth more than $6 billion over the next decade, based in part on contracts set to expire that cover thousands of spaces for prisoners; the government will either renew them or run the prisons itself. “If you are in the detention business, you have got to be interested,” Le Vay says. Burgon says his Labour Party is putting companies “on notice” and will seek to end all private prison contracts signed by Prime Minister Theresa May’s government if it comes to power at the next

 POLITICS

Bloomberg Businessweek

An Exiled Billionaire Haunts Thailand

Since 2007, Thailand has dropped the most among the region’s biggest economies in the World Economic Forum’s ranking of global competitiveness. Growth is projected to be 4 percent in 2019, according to the Bank of Thailand—less than the 5.2 percent across Southeast Asia as a whole. It’s the seventh straight year Thailand would lag its peers. In the northeast, a vast plateau of agricultural land that’s home to a third of Thailand’s population, voters still laud the populist policies Thaksin introduced two decades ago, including cheap health care and agricultural subsidies. “Thaksin was the first to pay attention to the region,” says Prajak Kongkirati, head of the government and politics department at Thammasat University in Bangkok. Prajak says the former leader’s allies face a tough challenge because of a new welfare plan rolled out by junta chief and current Prime Minister Prayuth Chan-ocha’s government. Conceived in part by a former Thaksin deputy, it offers farmers funds for harvesting and provides low-income earners about $10 per month to purchase household staples. A party backing Prayuth has also proposed lowering taxes, boosting the minimum wage by more than 30 percent, and guaranteeing prices for rubber, rice, and sugarcane. Sangiam Dangpaung, a farmer who’s always voted for Thaksin-linked parties, may switch his support to the junta chief because of the cash handouts. “I’m fed up with them now,” Sangiam says of Thaksin’s allies. “They only talk about being against Prayuth and nothing about how they’ll help us.” Some in the region are also backing an upstart pro-democracy party called Future Forward, led by Thanathorn Juangroongruangkit, a 40-yearold scion of a billionaire family. “Democracy is the most important thing,” Future Forward candidate Chutchawan Apirukmonkong says of the new party. Politicians advocating democratic reforms have found themselves targeted by junta-appointed election authorities. Future Forward’s leaders potentially face a ban from politics for allegedly spreading false information online, and a Thaksin-linked party was disbanded this month after it nominated King Maha Vajiralongkorn’s sister for prime minister. Nevertheless, Thaksin’s allies are the ones to beat in the election, most polls suggest. “The party represents Thaksin’s ideas,” says Kum Bomkod, a 70-year-old rice farmer who plans to vote for Pheu Thai. “Life was good with Thaksin.” —Blake Schmidt and Siraphob Thanthong-Knight

PRISON: PHOTOGRAPH BY KALPESH LATHIGRA FOR BLOOMBERG BUSINESSWEEK; THAKSIN: KYODO/AP PHOTO

○ Supporters of former Prime Minister Thaksin are favored in the March 24 elections

Thaksin Shinawatra hasn’t set foot in Thailand since he was convicted in a corruption case brought after a 2006 coup that deposed him. But in the poor northeast, the billionaire former prime minister is seemingly everywhere. On a sweltering March day, pickups full of farmers wearing straw hats and carrying umbrellas clogged the roads heading to a rally in Khon Kaen, one of the biggest cities in a region that’s helped Thaksin’s allies win every election since 2001. Speakers for the Thaksin-linked Pheu Thai party invoked him repeatedly in speeches, and supporters wore T-shirts depicting his sister Yingluck, who was ousted in a 2014 coup. Sudarat Keyuraphan, a former cabinet minister under Thaksin who’s one of two candidates leading the polls in the race to become the next prime minister in the March 24 election, jumped on a motorcycle to make it to the stage on time. “We believe in the majority of farmers, in the little people,” Sudarat says in an interview, echoing the message that endeared Thaksin—who, as an exile, is forbidden from direct involvement in the election— to working-class Thais. The vote will again test whether Thailand’s rural masses repudiate its coup-prone generals, who’ve ruled the country since seizing power in 2014. Thaksin’s opponents—a loose faction of soldiers, bureaucrats, and wealthy Bangkok families with royal connections—have used the military and the courts to invalidate the results of the past three credible elections and to remain in power. This time the military has a greater say in who will assume power: A nonelected Senate handpicked by the ruling junta will get a vote for prime minister, making it harder for Thaksin’s allies to form a government, even though they’re set to win the most seats in the House of Representatives. The prospect of a messy result risks more of the same discord that’s led to bloody protests in Bangkok followed by bouts of army rule over the past 15 years. The political battles have hampered economic policymaking and eroded Thailand’s position as a top manufacturing destination in Southeast Asia.

THE BOTTOM LINE Thailand’s national elections are seen as a chance to remove the ruling junta and allow the country’s voters to legitimately elect the next government.

March 25, 2019

37 ○ Thaksin

 POLITICS

Bloomberg Businessweek

March 25, 2019

The Cop Museum ○ The fund running it is close to defaulting on some of the money it borrowed

Connection pitched in, the 2016 bond documents say. Permitting issues and the 2008 downturn delayed the opening, and not until October did Clint Eastwood cut the ribbon. The actor became a superstar in 1971 for Dirty Harry, in which he portrayed a vigilante cop bent on violent justice. That two-edged role exemplified the tension at the institution’s core. The museum opened at a fraught moment. For decades, departments have aggressively policed minor crimes on the theory that doing so would forestall major offenses. But minority communities have complained of discrimination. Phone cameras and social media have allowed people to see officers’ use of force—including killings—firsthand, giving rise to the Black Lives Matter movement. There were riots and protests in Baltimore, Chicago, Ferguson, and other cities after police killed black men. The museum convened an advisory board of academics, religious leaders, and consultants and says it wants to promote dialogue. “If the choir is talking to the choir, you’re not pushing the conversation forward,” says Kris Marsh, a University of Maryland sociology professor on the panel. But the institution doesn’t prompt critical thinking, says Natacia Knapper, an organizer with the Stop Police Terror Project DC. More balanced presentations are available—free—at the Smithsonian Institution’s National Museum of African American History and Culture and the National Museum of the American Indian, she says. “I don’t think this museum has anything to say,” Knapper says. Now its ability to transmit any message is in doubt. The fund reported a $6.1 million net loss in 2018, leading it to raise ticket prices and cut 12 percent of staff. The bondholders’ outlook is grim. The organization told investors in January that it probably wouldn’t pay interest on debt due in 2020. It has already missed payments this year. Big-name backers have asked for assignments on how they can help, says Lori Day, interim chief executive officer. “We’re telling them to call their friends,” she says. —Amanda Albright THE BOTTOM LINE A museum that was first proposed in the tough-on-crime era encountered a very different world when it opened in the wake of outcries over police shootings.

“If the choir is talking to the choir, you’re not pushing the conversation forward”

ILLUSTRATION BY RINA BARBARIĆ

38

Former Presidents Bill Clinton and George H.W. Bush, six former attorneys general, one current attorney general, and even Richard Belzer, who played Munch on Law & Order: Special Victims Unit, couldn’t make the National Law Enforcement Museum a success. Just two months after its gala opening in October, the National Law Enforcement Officers Memorial Fund said its museum a few blocks from the Mall in Washington was headed for default on some of the $103 million it borrowed in 2016. That kind of failure is rare in the $3.8 trillion municipal bond market. And it’s a dramatic descent after two decades of planning and construction. To survive, the museum needs more visitors willing to pay $20 a head. A lot more. In its first three months, it attracted only about 15,000. It’ll require 20 times that to meet its first-year goal. That’s no easy feat in a city with more than 160 museums— and amid widespread anger over police use of force. Executive Director David Brant had been positive in February: “The reason I’m consistently optimistic is there’s nothing like this facility,” he said. “There’s not too many topics that are more important to the average citizen.” Brant resigned in March. After passing through airport-style security, visitors can take a photo in a patrol car’s front seat or check out a prison cell. A display shows off shivs, shanks, and other prison contraband. One section lets visitors guess what weapon was used to bash in different skulls, and they can use mock guns to navigate a simulated mass shooting. There’s a display on the rise of body cameras after the 2014 shooting of an unarmed teenager in Ferguson, Mo., which caused what the museum calls a “national debate about law enforcement and race.” The museum was conceived to complement a monument honoring slain officers that opened in 1991. The Memorial Fund, which oversaw the monument, was put in charge as part of a 2000 law signed by Clinton. The nonprofit raised money from companies such as gunmaker Glock, motorcycle manufacturer Harley-Davidson, and Target, as well as the J. Edgar Hoover Foundation. Celebrities including Belzer and actors from NYPD Blue and The French

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41

OR, HOW EDUCATION WILL HOLD US BACK AND SET US FREE

*FOR PERSONS AGE 25 AND OVER. EARNINGS ARE FOR FULL-TIME WAGE AND SALARY WORKERS. DATA: U.S. BUREAU OF LABOR STATISTICS, CURRENT POPULATION SURVEY

by JEANNA SMIALEK ANYONE WHO BELIEVES the system is rigged would have experienced a grim “told you so” moment on March 12, when federal prosecutors charged 33 parents who’d bought into a scheme to ensure their children spots at elite universities. Those implicated included an Oscarnominated actress, a co-chairman of international law firm Wilkie Farr & Gallagher, and the former chief executive of Pimco. Their alleged crimes were as varied as conspiring to fix test scores, bribing coaches, and falsifying athletic records. What they all had in common was wealth. The Twitterati crowed, nonwealthy students lamented, and for once both sides of the political spectrum were in agreement: The sweeping indictment underlined how deeply unfair U.S. higher

education has become. Success in the modern economy often seems to be more an accident of birth— hinging on family income bracket and connections or the student’s race and gender—than a reward based on individual ability and achievements. It’s an impression that cuts deep, given how crucial education is to economic mobility. College attainment is a decent proxy for a shot at the good life, at least in the U.S. Four-year graduates earn about twice as much per week as high school dropouts and have better health outcomes. Research by the late economist Alan Krueger, who died on March 16, showed that some of that benefit may come from college attendees’ better starting positions in life. NonHispanic white adults are almost 60 percent more likely to have graduated from a four-year college than

their black counterparts, Census Bureau data show. The Pell Institute for the Study of Opportunity in Higher Education finds that nearly 90 percent of high school graduates from affluent families enroll in college, vs. 60 percent of kids in the bottom quarter of income. Outside of education specifically, unequal access to opportunities is a global story. Barriers vary by country, but children are generally more unemployment rates and earnings by educational attainment in 2018, U.S.* unemployment rate 1.6%

doctoral professional

2.1

bachelor’s

2.2

some college, no degree high school diploma less than h.s. diploma

$1,825

1.5

master’s associate’s

median usual weekly earnings

1,884 1,434 1,198

2.8

862

3.7

802

4.1

730 5.6

553

42

March 25, 2019

the equality issue

likely to earn incomes similar to their parents’ in nations with higher income inequality. The graph of this relationship is often called a Great Gatsby Curve, first introduced by Krueger and named after F. Scott Fitzgerald’s novel about social mobility and its costs. Kids in Panama and Madagascar, where income is very unequal, are more likely to stay poor if they’re born poor. In countries where earnings are fairly evenly spread, such as Denmark and Finland, they’re more likely to be masters of their own fates. America is further toward the highinequality, high-immobility end of the scale than other advanced economies. Such stickiness leads to a problem International Monetary Fund economist Shekhar Aiyar calls “talent misallocation.” When high-aptitude people are shunted to the margins of society, “not only is it unfair, it’s also bad for growth,” he says. As Aiyar describes in a February paper, countries with high income inequality paired with low mobility see slower economic progress. Higher income inequality goes hand in hand with lower upward mobility in America, research by Harvard economists Raj Chetty, Nathaniel Hendren,

and others has shown. “It just speaks to this kind of question: To what extent are we a country where kids have this notion of the American dream?” Hendren says. “What can we do to improve it?” BOTH JONATHAN GREENBERG and Tyrell Jackson graduated high school with big dreams of working in music—Greenberg as a professor, Jackson as a performer. They’re imperfect analogues, but their stories demonstrate how different life can look depending on the world you were raised in. Greenberg, who’s 43, grew up in an affluent suburb of Boston, the high-achieving son of two white parents. His father is a physician. If there was ever a question around college at his private high school, it wasn’t whether he would go but where? Brown University was Greenberg’s answer, and his parents paid his tuition in full. “I didn’t even really think twice about studying humanities in college,” he says. He graduated with degrees in music and philosophy—and without debt, which he doesn’t hesitate to acknowledge was a privilege. “I was able to pursue things I wanted to pursue without thinking about the implication of college loans.” He worked relatively low-paying but résumé-padding jobs. After a Fulbright-administered teaching gig in Austria, he pursued a fellowship-funded Ph.D. in musicology from the University of California at Los Angeles. He later earned a second master’s, in library science, from the City University of

who escapes their parents’ fates? countries where children are less likely to be locked into their parents’ educational paths are also where they’re less likely to be locked into their income levels. GERMANY PORTUGAL

TAIWAN

DENMARK

SWEDEN

NORWAY

ROMANIA

U.K.

U.S.

PERU

EAST TIMOR

BOLIVIA

MOROCCO

GUATEMALA ECUADOR COLOMBIA

⊳ parents’ education more predictive of child’s

SOUTH KOREA

JORDAN

UZBEKISTAN

CHILE CHINA

RWANDA BENIN

CANADA

FRANCE

ITALY

BRAZIL

more income �

NEW ZEALAND RUSSIA

SPAIN

CROATIA

INDIA

FINLAND

JAPAN

SLOVENIA

ETHIOPIA NEPAL

New York at Queens College. Today, he and his wife both hold full-time, salaried jobs and are raising their 9-yearold son in Queens. He’s not rich, but he has a good worklife balance and feels like he’s making a contribution. “I don’t think of it just in terms of making money.” Jackson, 31, grew up in New Jersey, the black son of a single mother who hadn’t graduated college but held down a decent job. Lacking guidance and familiarity with the higher-education system, he enrolled in a community college musical theater program after graduating high school. “I felt like I was swimming in deep water,” he says. He was living with family and working at a restaurant in Newark’s airport to support himself, commuting an hour and a half from home to get there. Getting from work to school took another hour. Not long after classes started,

KENYA

ALBANIA LATVIA EGYPT UGANDA

less income � parents’ education less predictive of child’s ⊲

NOTE: MOBILITY DATA REPRESENT INVERSE OF INTERGENERATIONAL INCOME ELASTICITY DATA: WORLD BANK

Bloomberg Businessweek

PHOTOGRAPHS BY VICTORIA HELY-HUTCHINSON FOR BLOOMBERG BUSINESSWEEK

Bloomberg Businessweek

he was kicked out of his home. After about a month, Jackson dropped out. He was $2,000 in debt, with no college credits to his name and nowhere to live. In the 13 years since, he’s held jobs as a waiter, a singer with a Motown-style band, and a nursing assistant. He’s currently attending a free program at Per Scholas, which provides job training in technology. When he’s finished, he hopes to land a job that will allow him to help people and pay rent. For now, he calls a Bronx men’s shelter home. Neither Greenberg nor Jackson is working in music. Both have been largely self-sufficient throughout their adult lives. But while Greenberg’s upbringing laid a foundation for his evolving dreams—one built on familial and community expectations, with an emphasis on education—Jackson had less to fall back on. First-generation and lower-income students often have trouble navigating the opaque higher education system. In fact, poorer students who perform well on standardized tests generally don’t apply to selective colleges and universities, according to research by Stanford economist Caroline Hoxby, even when they’re highly qualified. College admission is only part of the mobility story in the U.S. and around the world. Elite college graduates dominate Chile’s top corporate jobs, for example, but women and poor men who attend top schools aren’t among those with better access to the most elevated roles. The country’s preferential network goes beyond alma mater, suggests economist

the equality issue

March 25, 2019

COLLINS and JACKSON in the BRONX

Seth Zimmerman at University of Chicago Booth School of Business, to favor men who went to pricey private schools. Despite all the unwritten rules, invisible cultural barriers, and hard-to-breach social divisions, education and training can help to level an uneven playing field. It’s an imperfect relationship, but places with educational mobility—where parental education is less likely to determine a child’s education—also tend to have better income mobility, World Bank researchers find. Terri Collins, 31, is hoping to break through her circumstances. She was raised by her mother, who worked on and off as a home health aide, but mostly they lived on her grandmother’s pension. Collins was a good student who wanted more than Brooklyn’s Flatbush neighborhood seemed to offer. “I wanted to get out,” she says. “You’re in control of your own destiny: That was always ingrained in me.” She got a scholarship to study English at Union College in upstate New York. It was a promising start, but it wasn’t enough to secure her path to prosperity. Her grandmother died before she left for college, and her mother passed

away while she was in school. At her 2011 graduation, Collins found herself alone, grieving, and with few prospects in a tough economy. “My opportunities were limited to whatever I could land a job in,” she says. She’s worked in sales ever since but has struggled with strict quotas and meager advancement opportunities. Collins is now living in Harlem and studying at Per Scholas, where’s she’s completing a 15-week training program in IT Support. She goes to class five days a week, usually from 9 a.m. to 4 p.m., then clocks a shift at a Trader Joe’s from 5 p.m. to midnight. Per Scholas has a good track record: About 85 percent of students at its Bronx location graduate, and 80 percent of them report getting jobs related to their training within the year. New York City’s tech industry, like the nation’s, is thirsty for qualified workers. Participants in the philanthropy-funded program have to fall below 200 percent of the federal poverty level to qualify, and admission is selective—only 25 percent of applicants get in. But such approaches could help reduce America’s twin gaps: opportunity and skill. Collins hopes it’s a ticket to a fulfilling career. For now, she’s “ringing up zucchini and heads of lettuce and cabbage, and apologizing for being out of cauliflower gnocchi,” she says. But she’s keeping her dreams alive. “This is not permanent if you don’t want it to be.”

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the way out of college admissions hell is … 44

video games?

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A 27-YEAROLD HARVARD DROPOUT HAS A SURPRISINGLY PLAUSIBLE FIX FOR A NOROTIOUSLY UNFAIR SYSTEM by ROMESH RATNESAR photographs by ROZETTE RAGO

no. 2 pencil not required

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IN STATISTICAL TERMS, this is the golden age of American higher education. More than 1 in 3 Americans has at least a bachelor’s degree, the most ever. Almost 70 percent of high school seniors graduating this spring will go to college in the fall, compared with about half during the mid-1970s. The benefits of all that education, however, are highly uneven. The campuses of elite colleges remain disproportionately populated by the rich. At selective universities—ones that admit fewer than half of applicants—3 out of 4 students come from the richest quartile of families. According to Opportunity Insights, a research group led by Harvard economist Raj Chetty, children from families in the top 1 percent of income distribution are 77 times more likely to attend an Ivy-plus school—Ivy League plus Duke, MIT, Stanford, and the University of Chicago—than those from the bottom 20 percent. Put another way: Higher education in America is a racket. On March 12, just as millions of nervous 12th graders were about to find out where they’ll be spending the next four years, the FBI announced the arrests of 50 people—including two Hollywood actresses, the co-chairman of a prominent global law firm, and the former chief executive officer of Pimco—in a scandal that exposed a culture of fraud at the heart of the college-admissions process. The FBI investigation, called Operation Varsity Blues, found that wealthy Americans are no longer buying spots for their children the oldfashioned way, with seven-figure donations, or finagling them through family legacies and social connections; they’re actively conspiring with criminal fixers, coaches, and college officials to cheat, lie, and bribe their way in, too. As Andrew Lelling, the U.S. attorney for the District of Massachusetts, put it in a press conference, “The case is about the widening corruption of elite college admissions through the steady application of wealth combined with fraud.” Getting a college degree has long been integral to the mythic promise

KANTAR

of American opportunity. Yet for millions, it’s become exactly that, a myth—and a very expensive myth at that. The average student leaves school carrying $30,000 in debt. More than 40 percent of students who enter college fail to earn a degree within six years, and many of them wind up in the workforce lacking the credentials and practical skills required to get ahead. The U.S. system of higher education isn’t the main source of economic inequality in America. But it’s almost certainly making things worse. A 27-year-old entrepreneur who dropped out of Harvard, Rebecca Kantar, has a plan to fix it. The American obsession with college admissions, she

says, benefits the wealthiest and highest-achieving students, while leaving the vast majority ill-qualified for the jobs of the future. She says a big part of the problem is the avalanche of standardized tests students take from kindergarten through high school, a $10 billion industry that drives much of what’s taught in the classroom. At the top of the pyramid sit the SAT and ACT, the generations-old multiple-choice tests that still help to determine who gains entry to top colleges and universities. In Kantar’s view, those tests reveal little, if anything, about whether a student has the cognitive skills essential for success beyond college. As the FBI’s investigation reveals, the SAT and ACT can also be gamed: The mastermind of the scheme had parents petition for their kids to take the tests in largely unsupervised settings, then submitted fake scores on their behalf. “The system has coalesced around things that work for at most 30 percent or so of kids,” Kantar says. “They don’t work for the rest.” Kantar is the founder of Imbellus Inc., a startup in Los Angeles that aims to reinvent

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testing and, in the process, challenge the received wisdom about what students are expected to learn. The digital assessments Imbellus has developed resemble video games. Placing users in a simulated natural environment, they present test takers with a series of tasks, all the while capturing the decision-making process used to complete them. And because each simulation delivers a unique user experience, they’re intended to be cheatproof. Since coming up with the idea for the company four years ago, Kantar has raised more than $23.5 million in funding, hired a dozen Ph.D.s, and persuaded the consulting giant McKinsey and Co., and a few others, to work with Imbellus to create game-based tests that measure prospective employees’ decision-making, adaptability, and critical thinking. She argues that by harnessing advances in computing power, artificial intelligence, and data science, her assessments can deliver a quantitative picture of how a worker thinks. But her goals go beyond providing corporate America with a sharper hiring tool: “That is a problem. We do try to address it,” she says. “But it’s not the problem.” Kantar’s premise is that huge numbers of American students lack the competencies required in an age of automation, because the country’s schools are failing to provide them with the proper preparation. “It’s not an aptitude problem—it’s a practice problem. They aren’t practicing the right kind of thinking.” In her view, expanding economic opportunity is impossible without transforming the way big institutions test for and evaluate student potential. “If you want to change the default settings in the system,” she says, “you’ve got to start at the top.”

environmentally sustainable development, which they run out of the bottom floor of their elegant five-bedroom home. From the start, Kantar’s interests were mostly extracurricular. She sewed her own clothes, played the trumpet, took up stained glass and pottery, and sold her handmade creations at friends’ bar mitzvahs. In junior high she started taking Mandarin— she slipped worksheets into waterproof folders so she could practice in the shower—and earned a grant from the city council to stage a Chineselanguage production of Cinderella. In high school, Kantar helped create Minga, a student-run charity dedicated to raising awareness about the child sex trade. The group raised $100,000 in five years, with Kantar leading a half-dozen other teens on a 40-city speaking tour. At 18 she gave her first TED Talk. “I really enjoyed thinking about how complex the problem was, how many different pieces were involved,” she says, over a plate of pasta near her parents’ home in Newton. “That’s what I learned about myself: I had a propensity for thinking about complex systems dynamics.” But she had little patience for formal education. “She didn’t enjoy her classes,” says her father, Jonathan, “but she did take them seriously. And she’s very competitive.” She devoted considerable time to tutoring her younger brother, Josh, who has an undiagnosed developmental disability. “I’ve always believed Josh is capable of more things than most people would assume, if he were taught those things in the right way. And as a little kid I put in a lot of energy figuring out what is the right way.” As a high school senior, she was accepted to Harvard, Princeton, and Yale, and was offered

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degree from a high-quality university was your ticket to success,” says her mother, Ruth. “But there was no stopping her. It wasn’t just ‘I want to quit because this is too hard’ or ‘I don’t want to do this anymore.’ She just finally convinced us that this was the right thing for her.” Kantar sold BrightCo to the expert-advisory company Gerson Lehrman Group Inc., moved to New York, and began plotting to disrupt the U.S. education system. She initially thought of designing an alternative college curriculum focused on work-oriented, project-based learning and selling it to elite universities. “It was the most fabulous nonstarter I’d ever encountered,” says Jeff Brenzel, a former dean of undergraduate admissions at Yale, who met Kantar in 2014. “These schools were not going to outsource half of their undergraduate program to Rebecca Kantar.” She decided to shift her focus away from what college students learned on campus to how they got there. In 2018 more than 2 million students took the SAT and 1.9 million took the ACT. Kantar argues that these standardized tests exacerbate inequality in two ways. Most obviously, they give an advantage to wealthier students who can pay for tutoring and test-preparation courses—or for fake scores, as was the case in Operation Varsity Blues. The other effect is more pernicious. At least as early as high school, classroom instruction is geared to boost kids’ performance on college-admissions tests. But those tests

“for more than 50 percent of kids, college is net bad”

KANTAR STANDS 5-FOOT-4, with straight brown hair that falls almost to her waist. She speaks in bursts of increasing velocity, as if she’s in a hurry. She grew up in Newton, Mass., an affluent suburb of Boston that churns out high achievers. Kantar’s parents own a construction company that specializes in

a full scholarship to Duke. She chose Harvard. “I wouldn’t say I was excited when I started, but I recognized why it was important to try it. After my first semester, I was like, ‘Yeah, no. Done.’” Her parents allowed her to move back home but insisted she stay in school. By that time, she’d written a business plan and gotten seed funding for her first company, BrightCo, a network of socially minded young entrepreneurs who provided brand advice to large corporations. When Harvard rejected her proposal to create an interdisciplinary major called Leadership and Organizations, she decided to drop out. “For us, it was drilled into our heads that a four-year

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measure what students already know, not the qualities employers and economists say they need to thrive in the future: problem-solving, critical reasoning, collaboration, creativity, empathy. “I’m interested in introducing tests that, hopefully, impose standards that shape curriculum in a way that’s better than tests that are shaping it now,” Kantar says. “It’s less about who does and does not get into Harvard. Yeah, that matters. It’s a topic. But it’s secondary to changing the default settings of the education-to-employment system so that it works better for all kids.” Kantar advocates project-based learning, rather than content mastery, and pushing students to apply their knowledge outside of the classroom. She doesn’t necessarily support a German-style system, in which a student is placed in either a baccalaureate or vocational track before entering high school. Rather, she’s arguing for creating standards that force schools to prioritize teaching students how to think for themselves. “The nature of human intelligence required in even the most elite jobs is very different than what it was 30 years ago. If you look at any job across the spectrum, whether it’s a blue-collar job or a white-collar job, the thinking skills involved are getting harder, not easier,” she says. “My point is not to reconnect education to work so that we pump kids out of college into factory jobs. It’s about schools’ focusing a little less on one specific set of information and a little bit more on the thinking faculties needed to be an adult.” Brenzel, the former Yale admissions dean, says the SAT and ACT “have become essentially what Rebecca believes: a measure of an important but very narrowly defined cognitive skill set. But there’s been no alternative.” The College Board—the nonprofit consortium of schools that owns the SAT and which generated more than $1 billion in revenue in 2017—has over the years introduced changes to the test, in response to accusations of bias in its questions. But it’s largely resisted altering the basic format: a timed, multiple-choice test of math and literacy skills, administered in a proctored setting on a scheduled date. The SAT remains a useful tool for predicting whether students can handle their first year of college, says Jack Buckley, a former senior vice president of the College Board, who joined Imbellus in January as its president and chief scientist. But in the wake of Operation Varsity Blues, the folly of using such an easily manipulated test for highstakes evaluation has never been more apparent. “There are a lot of people hungry for the system to change,” Buckley says. “But the College Board is a membership organization where the key members

are institutions of higher education. They can’t get too far ahead of what higher ed wants. And getting higher ed to change is hard.” In an emailed statement, College Board spokesman Zachary Goldberg says its research demonstrates that SAT scores “improve the ability to predict college performance above high school GPA alone.” IN 2016, KANTAR moved to Los Angeles with the beginning of the idea that would become Imbellus. She studied Tesla Inc.’s impact on the car industry. “What would it take to disrupt the big tests in this way? My answer was: a lot of time, a lot of people, and a lot of money. And I felt that, you know, those are things that you can acquire.” Her first hire was Richard Wainess, a 65-year-old educational psychologist at UCLA’s National Center for Research on Evaluation, Standards, and Student Testing. A veteran of the entertainment and gaming industries, Wainess focused his research on how to create a reliable test that’s as engaging and immersive as a video game. “Until now, no one had done it successfully,” he says. “They either sacrificed game for test or they sacrificed test for game.” After his first meeting with Kantar, Wainess told his wife, “I’ve just met Bill Gates, Mark Zuckerberg, and Steve Jobs.” They began assembling an eclectic team: psychometricians, 3D animators, video game designers, theoretical physicists. Kantar named the company Imbellus, after a kind of betta fish that doesn’t swim in schools. She decided its games would be

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ecologically themed, the idea being that any test taker, regardless of background, could grasp the laws of the natural world. To prevent cheating, Kantar insisted that no two test takers experience the game in the same way, which required devising tens of thousands of variations of each scenario, each with a uniform level of difficulty. It took a year to create the first prototype. “Very few people understand what a hard-science problem building a high-stakes assessment is,” says Kantar, who compares it to drug development. “Each one of these costs many millions of dollars to build, and we’ve only raised $25 million. So you don’t get that many swings at bat.” Kantar realized that finding a receptive audience for her tests also required challenging employers’ fixation on undergraduate credentials. It makes little financial sense for a student who wants a career as, say, a high-end electrician or coder to go to a four-year college and amass hundreds of thousands in debt. The trouble is that companies “overindex” for bachelor’s degrees

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when making hiring decisions, even for positions that don’t require a B.A. That’s in part because they lack the time and resources to assess a candidate’s skills in any other way. If Imbellus could show that its approach to testing could help companies identify talent they would otherwise have missed, it would be easier to persuade the educational establishment to start giving the assessment to students. Kantar just needed a partner willing to allow its recruitment process to be used as a laboratory for her product. She found one: McKinsey. Over the past 18 months, about 5,000 McKinsey job candidates in 20 countries have taken the Imbellus assessment, alongside the company’s traditional multiple-choice exam. For about half of those recruits, their performance on the Imbellus test is a factor in determining whether they receive an in-person interview. Presiyana Karastoyanova, a 22-year-old Bulgarian who’s studying for a master’s in finance at Imperial College London, took both tests after applying for a job at McKinsey in November. She prepared extensively for the paperand-pencil test, but had no idea what to expect when she was handed a laptop with the Imbellus simulation on it. “I thought I’d just improvise.” After she logged in, an animation of a lush tropical island appeared on the screen. She was presented

with three different scenarios, each one depicting a natural environment under stress. In one part of the island, she had to devise a plan to save native species from an impending natural disaster; in another, she was instructed to create a coral reef ecosystem that could withstand elevated levels of toxicity. She navigated crystalline scenes of wild animals, fish, plants, mountains, and ocean waters. “I became totally immersed. I forgot the world around me,” she says. Karastoyanova completed the tasks in half an hour and felt a rush of adrenaline, as if she’d just played a video game. (She made it through two rounds of interviews and was offered a job in December.) McKinsey plans to double the number of candidates taking the Imbellus assessment by the end of 2019 and

IMBELLUS headquarters in CULVER CITY, CALIF.

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even begin allowing some to take it on their home computer. Keith McNulty, the company’s head of people analytics and measurement, says the number will grow “significantly over time.” Early data suggest that a candidate’s performance on the Imbellus problem-solving simulation is a slightly stronger indicator of whether she’ll be hired than her scores on McKinsey’s traditional test— though Kantar says those results are not “earth-shatteringly groundbreaking.” And that’s still a long way from proving those people will be more successful on the job. “We kind of need companies who at this stage are interested in taking the pretty long-term view. Which is, they’re eventually going to run out of talent in their pipeline who are fit for the nature of cognition their work requires if they don’t invest in reorienting school toward teaching to these deep-thinking skills.” IMBELLUS’S HEADQUARTERS IN Culver City sits in a cluster of sleekly renovated warehouses. When I visited on a balmy morning in late January, Kantar’s black Tesla was parked in front. The office’s glass garage doors were pulled open, and a row of potted bamboo trees gave the place the feel of a boutique hotel lounge. While a group of Imbellus employees sipped coffee in the open-air kitchen, Kantar chased her Dalmatian, Nala, across the concrete floor. The company has developed six game-based simulations, in collaboration with McKinsey and its other corporate partners. (Citing confidentiality agreements, Kantar declined to identify them.) Imbellus’s software captures and analyzes every keystroke a player makes while going through the simulation, to arrive at both a “product score” and a “process score,” which Imbellus generates within two hours of the game’s completion. Erica Snow, the head cognitive scientist, says, “We’re not just interested in whether you got it right in the end. Cognition is dynamic—so we’re also incredibly interested in how you got there. The goal is not the same as in scoring a multiple-choice test. We want to know: How did you make the

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choices you made? When you made errors, how did you correct them?” The company uses artificial intelligence to make the virtual environments and animals look indistinguishable from the real thing. “You want to get people in a flow state while they’re taking the test, so that they’re functioning at their highest capacit y,” Kantar says. “You never want the art to distract. If I gave your kids a game that looked like PacMan from the ’80s, they’re going to be like, ‘Why is the screen broken?’ It doesn’t look like what they’re used to seeing.” Kantar says she was rejected by “something like 50” venture capital firms during a fundraising round last year, before securing her first major investment from Owl Ventures, an educational-technology-focused fund. VCs are skeptical about her in part because, she says, “I don’t look the part of someone who would be running a hard-science company. There are no mental models that they can hang on to in order for me to make sense. And Elizabeth Holmes certainly didn’t help my case.” Comparisons to Holmes, the disgraced ex-CEO of the defunct bloodtesting company Theranos—another dazzlingly bright, twentysomething female college dropout—are unavoidable. “People even say I look like her,” Kantar says, sheepishly. Jeff Hunter, a former Bridgewater Associates executive who’s advised Kantar, says, “When you’ve got a young female entrepreneur who is selling a big vision, you’ve got a lot people who are, like, is this smoke and mirrors? Is this going to be something where no one’s really peeling back the layers and looking behind the curtain and saying, ‘Is this real?’ But she’s making it work. There’s a real thing there.” Kantar has surrounded herself with women—including Imbellus’s chief operating officer and all four of its board members—but says doing so wasn’t a conscious decision. “It’s something we’ve discussed,

how much less scrutiny we would face if we were men, how much more implicit trust you’d get. But there’s nothing you can do about it, and talking about it makes you sound kind of silly,” says Meredith Perry, founder

medium for getting at deep-thinking skills than multiple-choice tests,” she says. “We’re using that to go back to colleges and say, ‘Hey, we’re already testing 70 percent of your graduates. Let us run our tests alongside the SAT, the ACT, and APs.’ If we can build a test that definitively measures skills that matter more for work and better predict outcomes that really matter on a longitudinal basis, like, why keep what we have now?” For all her ambition, Kantar is cleareyed about the prospects for top-to-bottom reform of the U.S. educational system. “I don’t think my test is a silver bullet. A lot of school districts have a lot of problems beyond the assessments they’re using. The under-resourced schools are still going to struggle. But I think that over a generation, hopefully, I can inch toward something that’s more relevant to adulthood than what we have today. The schools who start way behind are still going to be relatively behind in hitting that North Star. But hopefully in their preparation for it, their kids are going to be left a little better off.” Will they? “My worry is that the kind of assessment she wants to build is going to take us in the wrong direction—away from college prep and toward something even fuzzier and less rigorous and cognitively challenging than what we have today,” says Michael Petrilli, president of the Thomas B. Fordham Institute, a think tank focused on promoting standards-based reform. He’s met with Kantar. “My sense is that she doesn’t see a lot of value in teaching traditional academic skills, and I disagree.” To that, Kantar responds, “I’m not saying that kids don’t need to know history or math or biology. They do. But my thought is, can you move the North Star of the system a bit? You’re still going to biology class and history class, but in those courses there’s a little less focus on specific modules of curriculum and more focus on practicing the thinking that’s required for work and not just college. What I’m trying to do is to reconnect K-12 education with the world of work and the reality of being an adult.” She goes on: “I just want people to know that we won’t stop. At some point, it’s going to work, whether it takes 5 years, or 20 years, or 50 years and whether it means doing it alone or doing it with others. I’m really pretty sure that my initial mission and research was right—that this testing has to change to see the rest of the dominoes fall.”

“i’m not saying that kids don’t need to know history or math or biology. they do. but can you move the north star of the system a bit?”

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of the wireless technology startup UBeam and a close friend. “Rebecca’s not easily influenced by anyone at all. She’s not like some lucky kid. Everything she does is planned and thought out and very strategic.” Kantar plans to begin giving the Imbellus test to high schoolers later this year. She also says, without going into many details, that the company is bidding to take part in a federally funded national assessment that will test 100,000 students in 2022. IF THEY GAIN traction, tests such as Imbellus’s could, over time, help reduce the fixation on four-year college degrees by bolstering alternative paths to employment. Kantar says that “for more than 50 percent of kids, college is net bad.” Her goal isn’t to make higher education obsolete but to convince colleges they’re selecting students based on standards that no longer make sense: “We’re establishing that simulation-based assessments are a better

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March 25, 2019

home sweet home equity by 2016, median black household wealth had fallen to 9 percent of whites’—the same level as in 1965

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mass incarceration of black men caused black household wealth to slip in the 1980s

black household income peaked at 62 percent of whites’ in 1977, according to the data the researchers assembled. it was 57 percent in 2016

○ THE BEST RESEARCH on differences in black and white Americans’ income and wealth comes from Germany. University of Bonn economists Moritz Kuhn, Moritz Schularick, and Ulrike Steins assembled historical data from the Federal Reserve’s Survey of Consumer Finances from 1949 to 2016, analyzing income from all sources by households, not individuals. They found that the median black household narrowed the income and wealth gaps with its white counterpart through the late 1960s and ’70s in percentage terms, but it’s lost ground since. During the financial crisis, the housing market collapse was especially cruel to the best-off black households, because they were more likely to be highly leveraged, Schularick notes. They were also targeted with predatory loans. The researchers found that at the 90th percentile— households better off than 9 of 10 of their race—black wealth “collapsed” after 2007 while whites were “largely unaffected.” �Peter Coy

median income

median wealth

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white AMERICANS

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CHINA’s GRINDR turns to surrogacy

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GENG with BLUEDBABY marketing cutout

BLUED, A POPULAR DATING APP, IS HELPING PAIR GAY MEN WITH OVERSEAS SURROGATES. WILL THE CHINESE GOVERNMENT MIND? by DUNE LAWRENCE & DAVID RAMLI photograph by KA XIAOXI

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THE URGE TO have a child hit Geng Le hard after age 35. A former cop from China’s Hebei province, he’d launched a gay dating app called Blued a couple of years earlier, in 2012, and had become something of an icon for the Chinese LGBT community. Still, he felt his life was somehow incomplete without a child and that he owed it to his parents to sire a new generation. The next question was how to go about it. A friend had become a parent to triplets via surrogate, but that seemed sketchy because surrogacy is illegal in China. Another option was Thailand, a popular, relatively low-cost option, but by 2015 that country had banned foreign surrogacy. Geng decided on California, which offered the best legal protections for “intended parents” such as himself, excellent advanced medical care for the surrogate and the newborn, and a U.S. passport for the baby. “I thought about how the child, after it was born, might feel a lot of pressure, experience prejudice, feel insecure—‘other people have mothers, I don’t have a mother,’ ” he says. “But he’d have U.S. citizenship, so I could send the kid to study overseas.” The surrogacy process was a long drumbeat of tests, contract signings, and administrative details. When the due date came around, Geng flew to Los Angeles for the birth and held his son for the first time. “I was just a person, I was used to that,” he says. “After you become a father, you experience this love and this responsibility.” He returned home with his son, Xiao Shu, in March 2017. He also brought back a new idea for Blued: an overseas surrogacy service for gay men. The app was doing well, on its way to building up 40 million users and more than $130 million in venture capital; he figured many of the people on Blued would be willing to pay if the system could be made easier to navigate. A few months later, he launched Bluedbaby. The service, part of a larger strategy of diversifying into new business lines for the LGBT community, has seen modest success. Blued has its eyes on an initial public offering—ideally in the U.S., which offers a simpler IPO process and deeper

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capital markets. The trick for Geng will be convincing investors that he can expand his operations in a country where gay people have few legal protections and where every new service pushes the frontiers of government tolerance and social acceptance. NOT SO LONG ago, Geng was known by his birth name, Ma Baoli, and was married to a woman. But online, he was living a parallel life as Geng Le, creator of an increasingly popular website for gay men. In 2012 local media exposed his offline identity. When his superiors told him he could stay on the police force if he shut down the site, he decided to resign. In a country where stable government jobs are highly prized, the news that he was quitting horrified his parents. Their distress was compounded when they realized he was gay. His life transformed, Geng decided to double down on his online venture and launch a smartphone app. It was promising enough that, two years after it was released, Shunwei Capital and DCM invested a total of $30 million. At the time, Blued had fewer than 40 employees, no revenue, and no business plan, recalls David Chao, a DCM co-founder and general partner. What it did have was online traffic from a sizable community that, outside of urban cen-

workmen on rickety scaffolding are putting up signs for a Bluedbaby shop front, intended to advertise the service and give clients and staff a place to talk, away from the bustle of the main operation a floor above. The offices upstairs are adorned with rainbow flags, posters from global pride parades, and vivid murals depicting cartoon men (and a few women) wearing lab coats, hard hats, rainbow rocket packs, or mermaid fins. The current meeting room for Bluedbaby clients features a cardboard cutout of two young fathers embracing a burbling baby. Geng waves at a clutch of lawyers who’ve come to discuss IPO plans, his “Just Do It” T-shirt contrasting with their dark suits. Blued, like other dating apps, uses geolocation to help men find dates and connect with friends. Its most popular and lucrative service allows users to broadcast videos

economy of its own.” Chao’s 10 percent estimate might be too high— recent studies suggest that a lower percentage of people are gay—but in a country as populous as China, the market is still well into the tens of millions. Gay consumers are also wealthier consumers, says Eric Huet, a general partner at Ventech China Ltd., which invested in Blued in 2016. He estimates that in China they have five times the spending power of straight people, because they tend to have better jobs and no children (at least for now). And then there’s the international market; Geng estimates that two-fifths of Blued’s 40 million users are overseas. The company doesn’t disclose financial figures, but he says the domestic business has been profitable for the past two years. A few days before Chinese New Year in February, Geng leads a reporter on a tour of Blued’s headquarters in east Beijing. On the street below,

takes a cut. The app also brings in money from traditional advertising. In addition to Bluedbaby, the company is trying to get into the pharmaceuticals market by applying for a license to market PrEP, an HIV-prevention drug regimen. Geng, who’s on PrEP himself, says it’s impossible to get the drug in most Chinese cities, and it’s very expensive when available. The eventual plan is to market and sell it directly to Blued users and to leverage its sales power to negotiate lower prices. The company’s investors have suggested to Geng that he develop his diversification plans more before taking the company public.

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He says he hopes to have a $1 billion valuation by the end of the year—an ambitious target, to be sure. “The biggest difference between us and other companies listing is our ideals and beliefs,” he says. “We want to showcase a Chinese company diligently serving the LGBT community, showing that we do things with value, with philanthropy. That’s what I want to do the most.” THERE’S SOME IRONY for Geng that, as he’s worked to promote Bluedbaby, he hasn’t been living with his son. Xiao Shu is in Geng’s hometown of Qinhuangdao, about 190 miles east of Beijing, being cared for by Geng’s partner and parents. He video chats with Xiao Shu frequently and visits when he can. The air quality and lifestyle are better in Qinhuangdao, Geng says, and his parents are overjoyed to have their grandson with them. He credits his son with helping mend family ties; his mother was so shocked to learn he was gay, he recalls, that she fell seriously ill. His experience with the surro-

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“if, like me, you’re in your 40s and you still haven’t married, ters such as Beijing and Shanghai, remained isolated you still don’t have and hidden. The wager was based on demographics. “We believe that all human beings are alike, so children, how can you face China, with 1.4 billion people, could potentially have 140 million LGBT members,” he says. “Hence you that followers can reward with vir- your parents?” have a large enough community to support an entire tual gifts and money; Blued then gacy came to inform Bluedbaby. Hoping to have twins, he’d chosen for the surrogate to be implanted with two embryos. When only one came to term, he regretted not working with a second surrogate, a surer but more expensive bet. Bluedbaby shepherds clients through such choices, connecting them with steps such as choosing an egg donor, finding a surrogate, signing contracts, and navigating American culture. (Among other differences, Chinese custom often dictates that pregnant mothers stay inside and eschew computers, nail polish, and sex.) Three employees in L.A. book hotels, pick up clients at the airport, and help get them

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around the city. Fees for Bluedbaby can run to thousands of dollars, on top of what clients pay directly to fertility clinics and egg donation and surrogacy agencies. Geng estimates he paid $200,000 to such providers for his own child. Bluedbaby tries to eliminate some of the uncertainty inherent in the surrogacy process, he says. But there are contingencies no company can claim to prevent, such as miscarriages or stays in a neonatal intensive care unit. And for Chinese would-be parents, there’s the uncertain legal climate back home. Going abroad to have a baby by surrogate isn’t specifically banned, but China limits the amount each citizen can send offshore each year to $50,000, making transfers to providers difficult. There’s also risk after the child is born. China maintains an arcane system of residency permits, or hukou, which determine where children can get public schooling and health care. Parents have no standard process to ensure that babies

YARITZA MICHEL, a surrogate working with BLUEDBABY in the U.S.

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borne by overseas surrogates get these permits, raising the hugely expensive prospect that, as “foreigners” with a U.S. passport, the children will someday have to attend international schools. Still, the profit margins and potential demand are promising, and Geng expects Bluedbaby to be making money by the second half of this year. During the interview prior to the Chinese New Year, he describes the holiday period, known as Spring Festival, as a difficult time for the LGBT community, and an illustration of the need for a service such as his. “If, like me, you’re in your 40s and you still haven’t married, you still don’t have children, how can you face your parents, how can your parents face their friends?” Geng says, describing the holiday stress the LGBT community faces. “The regret is that your life isn’t complete enough. The second regret is that you owe a debt to your parents.” Bluedbaby wouldn’t make any of the clients it has signed up available for an interview, citing privacy concerns, but other gay men who’ve sought out international surrogates recount similar motivations. One, a 37-year-old marketing specialist for an international company who asked to be identified only by his English name, Russell, worked with a California agency called Los Angeles Surrogacy to arrange an egg donor and a surrogate for the child he’s planning to raise with his partner of five years. Family pressure, he agrees, was a major motivation. “I’m thinking maybe I can just skip the step, skip marriage, just to babies—that’s much easier for me,” he says. He’s already hatching a story about a girlfriend leaving him with the baby. Russell is exactly the kind of client Bluedbaby is targeting, though he hadn’t heard of the new venture when he started looking around. He expresses surprise on hearing that Blued is openly promoting a surrogacy business. “That’s a very controversial thing,” he says. “Our government is very communist. You don’t know what they’re going to do in the future. Maybe one day they’ll say, ‘Okay we have to stop this. You cannot do surrogate babies in China and you cannot promote it.’ What do you do?”

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It’s not illegal to be gay in China, and the days when the police would round up men who met surreptitiously in parks and charge them with “hooliganism” are mostly gone. Homosexuality was removed from an official list of mental disorders in 2001. On the other hand, China has no explicit legal protections against discrimination based on sexual orientation or gender identity. And the government has in recent years broadly suppressed civil society groups, including ones that promote gay rights, according to Darius Longarino, a senior fellow at Yale Law School’s Paul Tsai China Center. “Advocates in China don’t think the government is targeting LGBT issues per se,” he says, “but they are wary of any form of organization where people are finding each other and trying to create movements.” A few years ago, for example, one of the biggest apps for China’s lesbian community, Rela, was shut down following an event in Shanghai aimed at raising awareness of gay rights. (It later relaunched.) There’s also been some retrenchment of rules relating to public depictions of homosexuality. In 2016 the government banned portrayals of “abnormal” sexual behavior, including homosexuality, on Chinese television. The next year a government-affiliated group issued similar rules for online content, leading some platforms to ban anything gay-themed. Geng’s approach has been to cultivate relationships with officials and work assiduously to align Blued with public-health objectives such as HIV prevention and education. And when controversy has erupted, he’s managed to make his points to officials without drawing their ire. After the online content rules were issued, for example, he didn’t comment publicly, despite uproar in the gay community. Instead, he reached out to one of the officials responsible, who explained that he’d applied the TV rules without realizing what would happen. Geng framed it as a business issue, and suggested that next time there be opportunity for public comment. In January, when rules were issued for short-video platforms on subjects ranging from criticisms of the Communist Party to foot fetishes, they didn’t single out homosexuality. Geng considers it progress. Connecting gay men to surrogates is an especially challenging business, he acknowledges. It’s politically complex, high-touch, and slow compared with most e-commerce. Still, it’s coming along. Blued has so far helped a few dozen clients get to the U.S., and Geng anticipates good news within weeks. One of the surrogates is due on April 9. The first Bluedbaby baby is coming soon.

PHOTOGRAPH BY RAMONA ROSALES FOR BLOOMBERG BUSINESSWEEK

Bloomberg Businessweek

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March 25, 2019

house of the rising waters

FEMA paid out 95,235 flood loss claims in 2017, up from 12,907 in 2014

55 disparities in the distribution of FEMA aid left less economically stable victims, regardless of race, worse off HOWELL found that white people were the most likely to benefit, except for those with the least education

○ JUNIA HOWELL, a professor at the University of Pittsburgh whose work deals broadly with race and socioeconomic inequality, once lived in a depressed area of Houston and saw how frequent flooding affected her neighbors. She studied the impact of natural disasters on wealth in the long term and found that extreme weather events are exacerbating inequality—not just because of who the victims are, but also because of how society distributes disaster relief. Thanks to insurance payouts, white, college-educated homeowners who were affected by a large-scale disaster generally saw an increase in their long-term wealth. Most black victims, on the other hand, ended up worse off. Those patterns extend to disaster payments from the Federal Emergency Management Agency, which disproportionately help white homeowners in higher-priced areas, according to Howell. “FEMA aid is constructed to restore property,” she says, “not people’s lives.” �Christopher Flavelle

wealth change from 1999 through 2013 associated with natural hazards* homeowner

renter BLACK

college educated

● gain in wealth LATINX

● loss WHITE

$176k

high school

eighth grade

$158k

*IN COUNTIES THAT EXPERIENCED $1B IN HAZARD DAMAGES. CHANGES IN WEALTH DO NOT REFLECT FEMA AID

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Bloomberg Businessweek

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trans rights enter the workplace TRANSGENDER PEOPLE FACE WIDESPREAD DISCRIMINATION, AND THE SUPREME COURT HAS YET TO DECIDE WHETHER THEY’RE PROTECTED by JOSH EIDELSON interviews by RILEY GRIFFIN photographs by ZACKARY DRUCKER

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UNTIL JULY 2013, Aimee Stephens’s boss had only ever known her as a man. That month she pulled him aside at R.G. & G.R. Harris Funeral Homes in Garden City, Mich., where she worked as a funeral director, and handed him a letter that explained everything: how she’d felt imprisoned in her body; how, with help from her wife and her therapist, she’d “decided to become the person that my mind already is”; and how she’d soon “return to work as my true self,” dressed “in appropriate business attire.” Stephens offered to answer any questions her boss, Thomas Rost, might have and enclosed her therapist’s business card in case he wanted another perspective. She says he replied, “I’ll get back to you,” and walked away. A couple of weeks later, Rost fired Stephens. In a later deposition, he said he’d done so because Stephens “was no longer going to represent himself as a man” and “wanted to dress as a woman” instead. The dismissal set events in motion that could define

trans employees’ rights in the U.S. At issue is whether the Civil Rights Act of 1964, which bans discrimination on the basis of sex, prohibits companies from firing people because they’re trans. Under the Obama administration, both the Department of Justice and the U.S. Equal Employment Opportunity Commission said it does. “Someone is discriminated against because they changed genders—that’s discrimination on the basis of sex, basically by definition,” says David Lopez, a Rutgers Law School co-dean who served as general counsel of the EEOC under Obama. In recent years, trans workers have won unlawful-dismissal cases in district and circuit courts, including in the 6th U.S. Circuit Court of Appeals, which issued a precedent-setting ruling in Stephens’s favor in March 2018. Harris Funeral Homes has asked the U.S. Supreme Court to overturn that ruling, saying that Rost felt he’d be “violating God’s commands” by allowing Stephens to come to work as a woman. Under President Trump, the Justice Department has reversed its position on protections for trans workers, and with conservatives holding a 5–4 majority on the nation’s highest court, LGBTQ advocates worry that the court will agree to take up the case and wipe out their lower-court victories. Stephens has no regrets. “I’d do it again,” she says. “If you’re part of the human race, you should

have the same rights as everybody else.” Stephens was 48 when she first acknowledged to her wife in 2009 that there was “something different” about her—something she’d felt since the age of 5. For a few years after that, she stayed closeted at work. “You can, up to a point, compartmentalize everything into its own little square hole, and everything works,” she says, “until you get to that point: ‘I can’t do this anymore.’ ” Writing the letter to her boss took months, she says. The day she was fired, a Friday, Stephens called her local American Civil Liberties Union chapter in Detroit. By Monday she was meeting with an attorney there, Jay Kaplan, who helped her file a complaint with the EEOC. A district court sided with the funeral home, ruling that federal religious freedom law prevented the EEOC from forcing the company to rehire Stephens. But the 6th Circuit rejected that argument, ruling that “it is analytically impossible to fire an employee based on that employee’s status as a transgender person without being motivated, at least in part, by the employee’s sex,” therefore making such action illegal. The funeral home, which is represented by the right-wing group Alliance Defending Freedom, argued in its appeal that the judges “usurped the role of Congress, which has repeatedly considered and rejected” changing civil rights law to include explicit transgender protections. It said the company “reasonably determined” that letting Stephens come to work dressing and presenting as a woman would “disrupt the healing process of grieving families.” John Bursch, vice president for appellate advocacy at the ADF, says it’s healthier for people such as Stephens to try to “align their mind with their biological reality” rather than to “change their gender.” The funeral home

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wasn’t acting out of ill will, he says, but rather “out of love both for Stephens and for employees.” Fewer than half of all states have laws explicitly shielding trans workers in the private sector. If the Supreme Court does grant the funeral home’s plea to take the case and overturns the circuit court ruling, it could leave employees in much of the U.S. without legal protection if they’re fired for being trans. There is precedent to support the 6th Circuit’s decision. The judges cited Price Waterhouse v. Hopkins, a groundbreaking 1989 Supreme Court ruling establishing that the types of sex discrimination prohibited by the Civil Rights Act include punishing employees for not adhering to gender stereotypes, not just punishing them for being male or being female. There’s also the unanimous 1998 decision in Oncale v. Sundowner Offshore Services, Inc., written by Antonin Scalia, which held that the Civil Rights Act protects men from being sexually harassed by other men, thus extending its protections beyond what Congress may have had in mind. If the Supreme Court doesn’t take up the funeral home’s appeal, Stephens will be entitled to seek damages. That wouldn’t protect trans workers in other courts’ jurisdictions, however. “At the state and local level and company level, we have this big patchwork of explicit protection,” says Harper Jean Tobin, policy director for the National Center for Transgender Equality. But “there is a lot of confusion—even more so when you have a president and a Department of Justice who basically, through their policies and their case briefs, are saying that this 20 years of case law is fake news.” The NCTE’s 2015 U.S. Transgender Survey found the unemployment rate among respondents was 15 percent, three times the overall rate at the time. Among nonwhite respondents, 20 percent were unemployed. “The discrimination against transgender people is pervasive,” Kaplan says. Most of the calls the Michigan ACLU’s LGBT Project receives these days come from trans people, he says. Stephens herself has been out of work for five years, battling kidney failure. (Due to her health, she wasn’t available for a photo.) After the funeral home, she worked for about half a year as an autopsy technician at a private hospital in Detroit. She was known as Aimee from the day she arrived. “It was just a nice feeling to be able to go to work as myself,” she says. Now she goes to dialysis three times a week and tries not to think about the possibility that the Supreme Court will use her case to vacate trans workers’ protections. “If they do, it doesn’t mean we stop,” she says. “We keep going in different avenues until we can achieve our final goal.”

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meet some of your transgender co-workers

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DONNA ROSE

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PHOENIX ENTERPRISE LAN/ WAN infrastructure program manager, AMERICAN AIRLINES pronouns: she, her, hers when did you start coming out? I knew something was wrong from a young age, which seems to be a fairly consistent narrative for what I’ll call “midlife transitioners.” For those of us who grew up in the ’60s and ’70s, there were no words or labels to apply. I fit into the roles that were expected of me very well. I played football. I was attracted to girls. My wife and I bought two homes. We had a child. They used to call us yuppies—young, upwardly

mobile professionals. That was my life track in my mid-30s, and it was pretty good. I had come to peace with the two people living in this body. I found the internet and, all of a sudden, I wasn’t alone anymore. were you worried about coming out at work? I wasn’t, because at that point I’d come out to my wife, which was horrible; to my son, which was hard; to my family. I’d become very good at it. There’s a quote: “Courage isn’t the lack of fear. It’s the recognition that there’s something more important than fear.” That’s how I approached it. how often does your gender identity come up at work? I’ll be perfectly honest: The support that my

interviews edited for length and clarity

leadership—all the way up to our chief information officer—provides me to continue to be involved in LGBT work and, specifically, trans workplace leadership is one of the things that keeps me at American Airlines. There’s no shame, no hiding. how do you describe your gender identity? In my day-to-day life, I never even think about it. That’s the irony of it all. There’s a time when it’s all-consuming, and then there’s a time when it’s such a non-thing. It’s been this way now for 20 years, and I think I’ve found who I am.

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CHRISTIAN OROPEZA 34 WASHINGTON, D.C. vice president for commercial insurance, LONG & FOSTER pronouns: he, him, his

① transitioning: changing

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why did you go into insurance? I was an animal hospital receptionist 15 years ago, checking someone out, and they said, “Hey, kid, do you want to sell insurance?” So, I started selling insurance.

one’s gender expression to conform with one’s gender identity; may involve any or all

when did you start coming out? I was transitioning ① [while working at the animal hospital]. My manager didn’t believe in gay people but did believe in trans people. She believed it was possible we were wired as the wrong sex, but she only thought you could be a trans guy liking women. One woman refused to use male pronouns with me. Then there was another male receptionist, he flicked me in the chest and said, “Do you think you’re a guy now?” They were supportive at times, but weirdly homophobic and aggressive. It was funny. Well, it’s funny now. At the time it was just awkward and uncomfortable. what are your career aspirations? I would like to mentor more people. Last month this guy shocked me with something he came up with. And I was like, “Bro, who trained you?” and he was like, “You did. …” I want to be CEO soon. If it’s not at this company, someone is going to make me CEO within five years. It doesn’t matter where.

of the following: counseling, changing one’s name and/or clothing, hormone treatments, gender confirmation surgery

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Bloomberg Businessweek

VICTORIA STARRETT

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LOS ANGELES staff attorney, public counsel

were you worried about coming out at work? It was sort of terrifying. On my fourth day I introduced myself to someone using my pronouns, and they said they didn’t know what that meant, so they weren’t going to use them. The organization has admitted that they weren’t ready for trans folks and nonbinary ② folks to work there— and, quite frankly, for some of our clients who identify that way. The organization has been taking steps, but it’s been a long road to get here. [Margaret Morrow, president and CEO of Public Counsel, says she and her staff are “proud of the changes we’ve made,” and that Victoria’s coming forward has “made us a better organization.”] how is your experience being nonbinary different from that of binary trans people? I am always feeling like a fraud. Like, am I queer enough? Am I trans enough? Can I even use that label for myself? No matter where I go, I’m going to have to do a lot of work to prepare people to be more inclusive.

① genderqueer: similar to gender nonconforming; the word “queer” on its own can also refer to sexuality ② nonbinary: refers to the gender

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binary, either male or female; the gender spectrum includes gender identities that fall

how do you describe your gender identity? There are so many words going around now. Genderqueer ① is something that I also identify with, but nonbinary trans feels the most authentic.

in between or outside the binary

pronouns: they, them, theirs

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Bloomberg Businessweek

� LIZ FONG-JONES

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BROOKLYN, N.Y. currently: developer advocate, HONEYCOMB.IO formerly: staff developer advocate, GOOGLE pronouns: she, her, hers why did you go into software engineering? It was a family business: My uncles and aunts are engineers. Google is one of the best places where a transgender person can work. In terms of community, there’s a lot of transgender employees—there are several hundred out in the open. There’s

institutional support in terms of HR policies and health care. when did you start coming out? I have both the privilege and the awful luck that I realized I was trans when I was 15 years old. My dysphoria ① was so bad, I couldn’t cope with it other than trying to transition. I never had to deal with coming out at work. On the other hand, it does mean I had to deal with parents who were not supportive, and that was very traumatic. how often does your gender identity come up at work? As someone who is a binary trans person, I’ve run into sexism all the time. But in terms of

March 25, 2019

trans-specific situations, honestly, it doesn’t happen very often. I am open being trans, but at the same time, I’m not mentioning it in every breath. have any of your colleagues responded to you in a way that stood out? People would ask questions in bad faith. Like, “What about the white men in the industry?” or “Could you explain to me how it’s possible to have more than two genders?” Questions that make your blood boil.

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� ASHLEY OERTH 25 ① dysphoria: refers to gender dysphoria, recognized by the AMERICAN

NEW YORK investment strategy analyst, OPPENHEIMERFUNDS INC. pronouns: She, her, hers did your health plan cover the medical care you needed? There were limitations in the plan I was initially on when I joined the company, which meant I’d need to switch to a different, less preferred hormonal treatment until open enrollment began the next year. I spent eight months speaking with insurance representatives about getting my first procedure covered and was given

varied, inconsistent guidance about the documentation required. I spent an additional 10 months waiting to have the procedure. Three months ago, I began the same process for another procedure, this one newly, although only partially, covered. Even with meaningful connections through health-care providers and experts, senior HR colleagues at my firm, and advocates for the trans community, I still spend hours on the phone and doing my own research to make my health care happen. how often does your gender identity come up at work? At least once a week— usually by me. For me personally, it’s important to educate

my cisgender ② peers on the experiences, challenges, and diversity of trans individuals. how has coming out as trans affected the way your co-workers treat you? I often wonder how my experience would be if I didn’t mostly pass as a cisgender woman. While I’m grateful for the positive reception and support of my team, I did notice that some colleagues outside of my group may have stopped saying hi to me in the hallways, and I catch some staring now and then.

PSYCHIATRIC ASSOCIATION as involving “a conflict between a person’s physical or assigned gender and the gender with which they identify”

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March 25, 2019

JULIAN HARRIS

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WASHINGTON, D.C. licensed independent clinical social worker, therapist pronouns: he, him, his how does your racial identity intersect with your gender identity at work? The relationship between a client and therapist tends to be a microcosm for their world. Sometimes they’ve never been able to trust a man. Or they’ve been victimized by a man who was black. Or they’re struggling with their own gender identity, and the fact that I’ve been sitting in mine makes them uncomfortable. A lot of times, we produce a reparative relationship. They recognize that I’m not hurting them. There have been times when clients have been openly transphobic, homophobic, or queerphobic. But it can never be about me. However they feel about trans people doesn’t impact me—not on a personal level. When it comes to institutional structures and people in power who have negative feelings toward a certain population, then, yes, that impacts me. Sometimes people are lashing out because they’re hurt, and you just happen to be the person that’s there. If you can recognize it is not you, then it becomes easier to cope.

② cisgender: describes someone whose assigned gender conforms to their gender identity and expression

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the old boys

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HERE’S TO TRADITION, SAY THE DAYTIME-DRINKING, SEXUAL-HARASSING MEN OF THE LONDON INSURANCE MARKET

ity issue

of LLOYD’s

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by GAVIN FINCH photograph by CHARLIE KWAI

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R I S I N G F RO M T H E heart of London’s financial district along Lime Street is a tower so otherworldly that Marvel Studios cast it as an office building for a highly advanced civilization in the film Guardians of the Galaxy. The building’s guts—air ducts, stainless steel staircases, even power cables—are mostly on the outside, creating the futuristiclooking facade. The reality within, however, is years in the other direction.

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The tower’s iconic inhabitant, Lloyd’s of London, occupies the most archaic corner remaining in global finance, where life vacillates between the 17th century and the 1980s. Lloyd’s runs a 331-year-old exchange for the worldwide insurance market, not too dissimilar from the New York Stock Exchange of old. But while electronic trading has transformed exchanges across the rest of finance, including at the NYSE and the Chicago Board of Trade, the underwriters and brokers of Lloyd’s mostly do business the old-fashioned way: face-to-face, using rubber stamps, pens, and sheaves of paper. Thousands pack Lloyd’s cavernous trading floor in the well of the Lime Street tower’s 12-story atrium. Four additional open trading floors reach up the atrium’s sides like balconies over a noisy courtyard. The throngs work for insurers bidding to sell trillions of dollars in complex coverage to brokers representing the world’s largest corporations. If you fly on a commercial airliner, work on a deep-sea oil platform, or occupy a desk at a Fortune 500 company, you’re probably covered by a policy arranged through Lloyd’s. Beyond the quaint nature of the trading, other rites date to the first exchange Edward Lloyd opened in a 1680s London

the main trading floor at LLOYD’s

coffee shop. When a ship is lost at sea, the event is recorded with a quill pen in a leather-bound ledger kept near the center of the main trading floor, which Lloyd’s calls the underwriting room. To mark major disasters that yield billions of dollars in claims, such as the terrorist attacks of Sept. 11 and the Indian Ocean tsunami of 2004, a man in a red tunic and white gloves rings a golden bell. Other anachronisms are less genteel,

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including a deep-seated culture of sexual harassment—the full appalling range, from inappropriate remarks to unwanted touching to sexual assault. Bloomberg Businessweek spoke with 18 women who have more than 300 years of combined experience in the insurance market, and they described an atmosphere of near-persistent harassment. “It’s basically a meat market,” one industry insider says. After a harrowing experience that, she says, involved a senior manager drunkenly attacking her in a pub right around the corner from Lloyd’s, her employer convinced her it would be bad for her career to pursue a complaint. She’s since configured her professional life to stay away from the exchange. It’s a common choice among the women of London’s insurance market, and one reason the trading floor at Lloyd’s is a sea of men. The vast majority of people who work at Lloyd’s are not employees of the exchange, which has a worldwide staff of about 1,000 people, but the norms of the insurance market are in part shaped there. Inga Beale tried to redirect the industry after becoming the first female chief executive officer of Lloyd’s in 2014. She pushed for modernization of technology, attitudes, and behaviors—and met resistance at every step. She left shortly before her fifth anniversary, last fall. Among the relative handful of women left in the industry’s senior executive ranks in London, many fear that even the modest advances achieved under Beale are in jeopardy. They fear that Lloyd’s, already a deeply backward-looking institution, might actually be on the verge of regressing. THE MEN OF Lloyd’s pride themselves on their dress. Well-tailored dark blue and gray suits are the norm, often with bold chalk stripes. One does not wear brown shoes. A code mandating suits was lifted last year, but it was clear on several recent tours of the trading floors that almost everyone still adheres to it. Some of the older underwriters wear brightly colored suspenders, or braces. Even by the standards of London’s financial district, the vibe is sartorially conservative.

ANDY SHAW/BLOOMBERG

Bloomberg Businessweek

Bloomberg Businessweek

The exchange comprises members—mostly major insurance companies but also wealthy individuals (called “names” by the traders) and some private equity groups—that join together to form underwriting syndicates. They insure everything from global oil shipments to the Mona Lisa and even, famously, David Beckham’s feet. There are roughly 80 syndicates at Lloyd’s, each allotted a cluster of small desks and benches known as a box. When it gets busy, brokers form long queues at the boxes. Veterans use junior employees, known as slip jockeys, to hold their place in line until it’s their turn to sit on a stool next to the underwriter. They can, however, lose their privileges. Underwriters have been known to send brokers away from their boxes for not wearing a necktie. When some of the current crop of senior executives started their careers, women were still banned from the Lloyd’s floor. The ban was lifted in 1973, but, as with the dress code, changing the rules didn’t seem to change the culture. Women at Lloyd’s continue to be judged by their looks, according to Mairi Mallon, an insurance public-relations specialist writing in her blog, Sexism in the City. “Women at Lloyd’s boxes [are] still being called a host of names including ‘totty,’ ” Mallon wrote in 2017, and they’re rated “from 1-10 on ‘shagability.’ ” Historically, underwriters competed openly to hire the most attractive female assistants, in the belief that the prettiest ones would draw business to their

the equality issue

boxes, market veterans say. Traders still call them “box girls” or even “box bitches.” Beale knew the underwriting business and its culture. Her first job, in the 1980s, was as an underwriter trainee at Prudential’s London office, where she was the only woman on a team of 35. One day she privately complained to her boss about posters featuring women in wet T-shirts and bikinis. “The next day,” she recalled in a 2016 BBC interview, “I came in, I walked around the corner, and saw my desk—and my desk was wrapped up in the posters.” She walked onto the elevator and out of the building, and three days later resigned. That was 1989. Some things have changed in the 30 years since that morning—there are far more women working in the London market, and these days they’re allowed to wear what they like—but the boysclub mentality runs deep. “Fundamentally, to crack behaviors [and] clubby groups that have known how to support each other over centuries, to kind of really crack that is incredibly tough,” Beale told Bloomberg Businessweek in September. It was one of her last interviews before she stepped down. Early in Beale’s tenure, she introduced several diversity initiatives, asking the CEOs of the world’s biggest insurance companies to commit to increasing diversity and inclusiveness in their firms. Before long, she faced challenges from within. She was told by the council and the governing board of Lloyd’s that she spent too much time on diversity.

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Some male executives doing business at the exchange complained privately that they found her patronizing and aggressive. One of Beale’s friends recalls men approaching her to inquire whether she could ask Beale to “tone it down.” From that point forward, Beale carefully tracked her time, making certain she spent less than 25 percent of it on diversity initiatives. Other critics, particularly the anonymous ones, were much less subtle. The trolling came via email and—this is Lloyd’s, after all—on paper. Some messages went to Beale’s sixth-floor desk, including one that declared she “should go and die”; others were sent elsewhere within Lloyd’s. One said that Beale should stop speaking about her bisexuality—“She shouldn’t be talking about things that go on in the bedroom”—and demanded that Lloyd’s “fire this woman.” Women in the market faced similar verbal harassment and occasionally endured physical assault at the hands of powerful executives. Having a woman upstairs had changed that almost not at all. ALTHOUGH LONDON IS a global leader in entertainment, media, and finance, the kind of #MeToo allegations that have hit those sectors in the U.S. have yet to surface in a meaningful way inside the U.K. That’s likely a result of a British legal system geared to protecting privacy, which limits the kind of naming-and-shaming culture that’s pushed so many men out the door in America. Many of the women Bloomberg Businessweek spoke to said pursuing their abusers in the U.K.’s courts wasn’t feasible given the high costs involved and potential damage to their reputation within the industry. All of the women would speak only on the condition that their identity be protected. Bloomberg Businessweek verified their employment records and, where possible, confirmed with colleagues or friends that they had previously shared their accounts. They’ve worked for some of the world’s largest insurers and insurance brokers, including Aspen Insurance Holdings, Arthur J. Gallagher & Co., Marsh & McLennan, Munich Re, and more. “We want women to have every opportunity to build great careers and thrive in a culture where inclusion is a core value,” Chris Lay, CEO of Marsh U.K. and Ireland, said in a statement. “Inappropriate behavior is unacceptable and will face the strongest sanction.” A spokesman for Munich Re said the company “strives for an open, equal culture and takes indications of misconduct seriously.” Aspen and Gallagher declined to comment. Women with international experience in insurance and other areas of finance say the pervasive harassment at Lloyd’s and in the wider London market is unique. And they all say it begins with alcohol. Deals born on the Lloyd’s floor, or in nearby offices, slosh into the pubs and vice versa. All day long, underwriters move from the trading floor to the pub to their own offices, then back to the pub again. The London insurance market is the last place in global finance where drinking

“it’s basically a meat market”

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isn’t only tolerated, it’s expected. The historic Leadenhall Market, an ornate covered arcade, is just a few steps from the entrance to Lloyd’s, and most lunchtimes insurance industry workers crowd outside the Lamb Tavern, a pub that dates to 1780, sipping pints of frothy ale and talking loudly about the morning’s deals. Smartly dressed senior executives drink alongside junior underwriters and their secretaries. In the summer months the drinkers outside the Lamb can number in the hundreds. Under most circumstances the atmosphere is boisterous and good-humored, but Lloyd’s drinking culture has created an environment in which women aren’t always safe. One female executive in her 30s says a male manager assaulted her after a night out with co-workers. She was new to the insurance industry, having spent much of her career in banking in the U.S., and was surprised by the amount of drinking. But she felt the need to go along. She agreed to share a cab with the manager back to their respective homes. The man was so drunk he was slurring. Suddenly he grabbed her. She was terrified until she managed to break free from his grip and get out of the car, she recalled during an interview at a coffee shop around the corner from Lloyd’s. Wary at first about talking of the attack, she soon becomes angry and her voice rises. “After that, he basically started bullying me, and things got progressively worse,” she says. “I was new to the team and just wanted to be accepted, so I stuck it out.” She became increasingly marginalized. She levied a formal complaint, and then was moved to another part of the business. Her attacker was allowed to stay in his job. Young women at Lloyd’s “are just cannon fodder,” one female broker says. “Unless you have a rich father, you aren’t going to be able to afford suing. You’re also going to f---ing destroy your reputation, and you basically have to decide that you will never work in the industry again.” None of this comes as a surprise to Barbara Schönhofer, an industry headhunter with more than 20 years’ experience in the market. “I don’t know a single woman who hasn’t been harassed in one form or another in the London market,” she says. A decade ago, Schönhofer started a group for female leaders in the business. The Insurance Supper Club now has more than 700 members worldwide and holds events in seven countries. At every one, she says, sexual harassment comes up. At a dinner in London last year, Schönhofer says, she asked 10 senior executives which of them had been harassed at work. Nine raised their hands. “No one should ever experience harassment of any kind at work, and it is distressing to hear that this

is still happening,” said John Neal, Lloyd’s new CEO, in a statement. “We take it extremely seriously and will be talking to the Lloyd’s market to ensure that we stamp out these inappropriate behaviors. Lloyd’s has worked really hard to put the broadest inclusion agenda at the center of everything we do.” BEALE DIDN’T PUBLICLY connect the drinking culture at Lloyd’s to sexual harassment, but in early 2017 she sent an email to Lloyd’s employees banning booze during the day. “The London market historically had a reputation for daytime drinking, but that has been changing,” Beale’s note said. “Drinking alcohol affects individuals differently. A zero limit is therefore simpler.” Although it applied only to Lloyd’s employees, it was one of those moves that had the potential to influence the whole industry doing business inside the Lloyd’s exchange. Complaints deluged the Lloyd’s intranet and were heard across the industry. Some men drew comparisons to an Orwellian Big Brother state; others sneered that Beale was trying to run their life as if she was their mother. “Fury as Lloyd’s of London bans its staff from drinking alcohol from 9-5,” ran a headline on the website of the Daily Express. “Be careful not to take too dim a view of alcohol,” said the headline atop one letter from a broker published in the Financial Times. In the end, it was all noise. The ban has been widely ignored, according to executives from insurers in the market. Beale did inch Lloyd’s forward in other ways. She did more than any other executive to drive diversity and inclusion to the top of the agenda in the industry. Many of the biggest Lloyd’s insurers now include it as a metric when calculating senior executive pay. Beale also forced the brokers and underwriters at Lloyd’s onto an electronic trading platform. When

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she took over, everything was being done on paper, much as it had been for the past three centuries. By the time she stepped down, about 16.5 percent of the market’s business was being placed online. Women working in the London market say Beale’s focus on diversity first, and harassment after that, might have gotten it the wrong way around. Senior ranks are thin on women, they say, because so many are forced out in their 20s and 30s by the constant stream of harassment from male colleagues. Beale seemed to acknowledge as much. “If I look out at the very senior level, it looks a bit bleak, if I’m honest, and it doesn’t feel great,” she said in September. “I’ve seen so many senior women departing their roles.” Many of those who remain told Bloomberg Businessweek they’re concerned that Lloyd’s was sending them a message with its new CEO pick. Lloyd’s Chairman Bruce Carnegie-Brown had set six criteria for the new CEO, and they didn’t include anything about diversity. A headhunter generated a list of candidates, which was whittled down to five men and one woman. Carnegie-Brown chose Neal, the former CEO of the Australian insurer QBE Insurance Group Ltd., who’d spent most of his career in London. The all-male nominations committee agreed with the choice and sent Neal to the Lloyd’s council, whose 14 men and 2 women concurred on Sept. 7. Council members knew Neal’s former employer had docked his pay for not disclosing he was in a relationship with his personal assistant. What they didn’t know, according to senior sources familiar with the selection, was that the woman in question had replaced Neal’s previous assistant—after he had married her. Neal declined to comment on his hiring. He took over Lloyd’s on Oct. 15.

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a woman’s place is where?

the U.S. BUREAU OF LABOR STATISTICS estimates that women still spend an average of 67 percent more time on child care than men do.

at least according to the GENERAL SOCIAL SURVEY, millennial men are more egalitarian than millennial women. seventynine percent said women should be equals at home and at work, vs. 74 percent of women in their age group.

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in 1977, 59 percent of respondents to the survey said women should work at home and nowhere else. about a decade later, that figure had shrunk to 20 percent.

○ ATTITUDES TOWARD WOMEN’S roles in society have been growing more egalitarian since the disco era, but there’s a long way to go. University of Illinois at Chicago Ph.D. candidate William Scarborough and professor Barbara Risman, along with Ray Sin, a behavioral scientist at Morningstar Inc., analyzed more than 40 years’ worth of data from the federally funded General Social Survey to try to discover why. After examining two sets of responses—one pertaining to women’s roles in the home and one about their roles outside of it—they found that those attitudes began to diverge in the 1990s. Americans increasingly accepted women in the workplace, but they still wanted them to put family first. The good news, says Scarborough, is that 69 percent of Americans today think men and women should be equals in both spheres. “That’s not to say we should be happy with what we’ve got,” he says. “But we’ve done some things right.” �Jillian Goodman

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JIM FITTERLING chief executive officer

LIZ WESTERMAN production coordinator

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EMILIE SCHROEDER operational excellence specialist

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DOW CHEMICAL IS BASED IN TRUMP COUNTRY, LOATHED BY ENVIRONMENTALISTS, AND RUN BY A GAY CEO by JEFF GREEN NICOLAS SANCHEZ DE MARCO funding manager

photographs by RYAN PFLUGER

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MRUNMAYI KUMBHALKAR senior engineer, core R&D

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ON APRIL 1, DOW Chemical will be spun off from DowDuPont Inc. to form an independent company. The move will be big for the corporate financiers behind it, and for the manufacturers around the world that put Dow’s chemicals in running shoes, mattresses, adult diapers, baby wipes, and many other products. But it will also be a bellwether for a great many other people. When the spinoff is complete, Dow, which was founded in 1897, will be the first large industrial company with an openly gay chief executive officer and only the second major public company with a gay CEO, after Apple Inc.’s Tim Cook. “I hope the first thing that people think about me is not that I’m gay,” says the new boss, Jim Fitterling, during an interview at Dow’s headquarters in Midland, Mich. “I’ve put a lot of my life into the company, and I understand the company really well, and I know what it takes to deliver good financial results.” Unlike Cook’s identity—which he announced in a Bloomberg Businessweek essay that made international news when it was published in 2014— Fitterling’s sexuality went mostly unremarked on when he was appointed by Dow’s former CEO, Andrew Liveris, last year. “It’s just interesting when it comes up. People say, ‘How did you get there?’ ” says Liveris, referring to Dow’s having a gay CEO. “And I kind of look at them quizzically and say, ‘Get where?’ ” Although neither Liveris or Fitterling would ever put it this way, Dow—whose legacy includes making napalm during the Vietnam War and much of the plastic waste polluting the world’s oceans today—is also, somewhat improbably, woke. The company has scored a perfect 100 on Human Rights Campaign Foundation’s Corporate Equality Index every year since 2005, meaning it meets every requirement for an LGBT-friendly workforce. These include having policies protecting employees from discrimination, benefits for domestic partners, coverage of the health needs of transgender employees, and a track record of advocating publicly for LGBT causes. Dow, of course, isn’t alone. While the

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country remains deeply divided over LGBT rights, corporate America has been faster to embrace social change than the rest of us, and not only in coastal cities or traditionally liberal industries. Dow’s hometown of Midland, population 42,000, is a world apart from Apple’s home base in the Bay Area. Less than a week after the Supreme Court legalized gay marriage in 2015, a Midland district judge stopped performing marriages. The same year, when the local newspaper announced the promotion of one of its editors, a state representative sent out an “agenda alert” to warn constituents that the editor was gay. (The representative later apologized.) Donald Trump won Midland County by 20 points; the county has voted for a Democratic presidential candidate only once in the past century, for Lyndon Johnson in 1964. But Dow’s politics are different from Midland’s. Starting in the late 1980s, it began creating “employee resource groups” for women and minorities. There are now 10 such groups, which Liveris says has allowed the company to recruit from a wider talent pool and to avoid losing longtime executives such as Fitterling to more progressive

management before relocating to Hong Kong to work on a unit dedicated to water treatment products. During his 11 years in Asia he rose through the ranks, eventually taking over Dow’s operations in Southeast Asia and Australia, with stints in Sydney, Bangkok, and Kuala Lumpur. Through all this, only those closest to Fitterling knew about his sexuality. He met the man he eventually married while posted in Hong Kong in 1994, but at work he was still in the closet. “It wasn’t something that you went out of your way to talk about,” he says. “There was almost no reward for doing it, and there was a lot of risk.” Fitterling finally decided to come out in 2008, after he was diagnosed with cancer. “I was going through several surgeries, a year’s worth of chemo,” he recalls. “I started to look around and say, you know, I’m going to have to make some changes in my life. And one day I was thinking about a lot of stresses that I needed to reduce, and one of them was trying to live two different lives.” Initially he told only close colleagues, but as he continued to climb the executive ranks, he started to feel like he had do something more public.

companies. “We’re here in the middle of Michigan, and there’s no question we could be labeled as a company that may be superconservative based on the physical location of our headquarters,” says Liveris, who turned the company over to Fitterling last July. But, he continues, “we’ve always put a premium on human talent.”

gay but not willing to be out publicly, then what’s your thought process about being able to be out?” he says. Then he supplies the answer: “Well, if he’s afraid of doing it, then I’m afraid of doing it.” In 2014 he decided to make an announcement at an internal company event for National Coming Out Day. Next to him on stage was Chief Financial Officer Howard Ungerleider, a straight man and the executive sponsor of the LGBT employee group GLAD (for Gays, Lesbians, and Allies at Dow). “I would say to you, having lived with my own thoughts, inside my own mind, for a number of years, and having come out, most of that fear was my own, and it wasn’t anything that was out there to

“when they come to work here, they need to “If you’re a young employee coming work here and you think that one feel safe” toof the top managers of the company is

FITTERLING IS 57, and like many of the company’s executives, he’s a Dow lifer. He grew up on a farm in Odessa, Mo., about 35 miles from Kansas City and joined Dow after graduating from the University of Missouri. In the mid1980s he worked at various points in sales, marketing, and supply chain

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be afraid of,” Fitterling told colleagues in an auditorium at the corporate headquarters or watching via webcast. He’d been at Dow for 30 years, he pointed out, and with his partner for 20. “That part of my life had been very separate from my Dow life for that whole 20 years,” he said. The following year, after the Supreme Court ruling, they married. IN MIDLAND, WHERE Dow is so beloved that even the odd smells emanating from its factories are treated with something close to affection, it’s common to see the company’s inclusiveness as a strand of its corporate DNA. “It starts with the fact that Herbert Henry Dow was not from here,” Ungerleider says. Born in Canada, the company’s founder picked Midland as his corporate base in 1897 because of the area’s plentiful supply of bromine, a key ingredient in medicines, photographic chemicals, and other products. “This was a farming community, and the townsfolk at the time called him Crazy Dow,” Ungerleider says. Extracting bromine required shooting electricity through salt water, which can be dangerous. “He literally and figuratively blew himself up a few different times,” Ungerleider says. Although the hit products the company eventually developed and sold—among them Saran wrap and Styrofoam—came to define a certain suburban conformity, they were, Ungerleider argues, radical in their own ways when Dow introduced them, in 1933 and 1947, respectively. (The company sold its consumer brands to S.C. Johnson & Son Inc. in 1997, shifting its focus back to specialty chemicals.) Dow hired its first female research scientist in 1929, and a team of women was instrumental in the expanded usage of silicon-based materials in the 1940s. Bettye Washington Greene, who joined Dow in 1965,

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was an early advocate of black women in the sciences. The company’s first employee resource group was the Women’s Innovation Network, in 1989. In 2000 a group of Dow employees that included Louis Vega, a former Republican political operative who’s gay, began a push to get the company to offer domestic partner benefits to same-sex couples. Dow agreed two years later; it added gender identity to its nondiscrimination policy in 2007. GLAD, as Vega’s group came to be known, included gay and straight employees and eventually grew to include more than 3,000 participants in 45 chapters. Today, Vega, who served as chief of staff to Liveris and is now Dow’s vice president for North American government affairs and advocacy, acknowledges that the company’s progressiveness might appear unlikely, but he sees it as sending a powerful message to other companies. The effect, he says, is that others might think, “Wow, if this company has these stances, then shame on us.” LAST YEAR, DOW started flying the rainbow flag outside its headquarters, near the Stars and Stripes and those of other countries where it operates. The small gesture prompted letters to the local newspaper cautioning the company not to impose its views on locals. Fitterling isn’t bothered by the response. He says he likes to think of Dow’s offices as embassies—whatever the law outside, Dow policies and values are enforced on its grounds. “Maybe we’re in a state where an LGBT person doesn’t feel safe because of some of the state laws, but when they come to work here, they need to feel safe,” he says. Fitterling acknowledges that Dow’s record for women and minorities still needs improvement. Only 27 percent of the

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company’s U.S. employees are women, and its leadership is composed overwhelmingly of men. Just 18 percent of top managers are women. Meanwhile, only 21 percent of its U.S. workers aren’t white. To help boost some of those numbers, Dow appointed its first inclusion executive and added an inclusion goal to top executives’ bonus structure last year. They’re now expected to set—and meet—goals for their departments. The change is designed to get more white men involved in discussions about diversity, a step Fitterling regards as crucial. Most of GLAD’s members, he notes, aren’t gay. “Inclusion is about everybody feeling like they’ve got an equal shot to get ahead and everybody feeling like it’s a safe environment,” he says. “That’s what we’re trying to create.” Of course, protecting this safe environment means protecting the new company once the spinoff is complete. Hedge fund manager Nelson Peltz, who advocated for the 2015 plan to merge Dow with DuPont and then spin off the combined operations into three companies, sold his stake in late 2017, shortly after the merger was completed. In February, Bloomberg News reported that Dan Loeb, another prominent hedge fund manager and backer of the merger and spinoff, was no longer as optimistic about the company’s prospects because of the slowdown in the global economy. DowDuPont shares have fallen about 21 percent in the 18 months since the merger. Fitterling has waved off concerns about financial performance, promising at an investor presentation in November that after the spinoff Dow will pay the highest dividends of any chemical company. He also said he expects to increase plastics production by 1.4 million tons per year. The added revenue, plus cost cuts, will contribute to Dow’s plan to increase earnings by about $3 billion, he said. (He also acknowledged environmentalists’ concerns about increased plastic production and suggested that the solution was improved waste management.) A marker of the company’s progress came on a June evening last year, when Fitterling threw out the first pitch for Pride Night at Dow Diamond, the venue where the Class A Great Lakes Loons compete against the likes of the Fort Wayne TinCaps and Quad Cities River Bandits. Pride nights still aren’t that common in minor league baseball, but with Dow’s backing, Midland has embraced the concept. The Dow CEO took the mound in a rainbow-patterned uniform and tossed a rainbow baseball. On his feet were a pair of Under Armour running shoes with rainbow padding. The foam, like so much else, was manufactured by Dow.

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3,732 women wanted ○ BY THE END of this year, all public companies based in California will be required to have at least one woman on their board. By the end of 2021, most will need three, according to a law passed last year—a sea change that could offer women 692 seats at the table, enough to cause a measurable shift in the gender balance of U.S. ● board ● board board would 2021,

seat held by a man, U.S. seat held by a woman seat held by a man that have to go to a woman by by sector

company boards overall. By 2021, companies with five directors must have two women on their boards, and companies with six or more must have three. But what if it doesn’t stop there? If every state were to follow California’s lead, Russell 3000 companies would need to open up 3,732 board seats for women within a few years, an increase of 75 percent from current levels. �Jeff Green, Hannah Recht, and Mathieu Benhamou

energy consumer staples

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94 percent of CALIFORNIA companies have six or more board members

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