How Markets Can Change to Ease Economic Inequality
Experts weigh in on economic, education, and financial gaps at a recent Stanford GSB conference.
With income inequality a front-burner issue, nearly 200 scholars, venture capitalists, and leaders of socially focused nonprofits gathered at Stanford Graduate School of Business in mid-October to examine strategies aimed at benefiting the poorest 50% of the population.
The Innovation for Shared Prosperity Conference focused on innovative financial, social, and research models that can improve inequality and how universities and private industry can partner to bring about social change.
There are no quick fixes for economic inequality, the panelists agreed. Some solutions wind up disappointments, like programs in the banking industry designed to educate consumers about financial decisions and the extensive use of PCs in classrooms. “The financial services industry is spending a lot of resources to get people to do things that are bad for them,” said David Laibson, a professor of economics at Harvard University.
But the panelists noted some successes. ideas42, a socially-focused think tank, took on the widespread problem of people not beginning to save for retirement early enough and developed an innovative technique using selfies and software that aged the images of people in Mexico. As a result, a significant number of the subjects began a savings program.
Here’s a look at some of the other highlights from the conference.
Winning Strategies for Industry-Academic Partnerships
Too often, industry and academics don’t start off on the same page when they agree to partner, says Josh Wright, a director of ideas42. Academics, for example, want to do rigorous testing; but businesses often prefer to move faster to get results, even if it means being less rigorous. Businesses are looking for competitive advantage, while academics want to publish and disseminate their findings, and each side works at its own, sometimes contradictory, pace.
“We need to align the incentives of both sides,” said Stanford GSB professor Susan Athey.
There are significant advantages for both sides to partner.
Athey, who has worked at Microsoft Research, said that working in the field, that is in industry or government, is an opportunity for researchers to learn about real-world problems and have a better sense of which solutions are realistic. Students and post-docs benefit from the hands-on training they get in business, she added.
For their part, businesses gain access to smart people who have undergone the kind of rigorous training not often found in industry; hiring equivalent talent would be difficult and expensive. And businesses get access to cutting-edge research results that they are able to scale and own quickly and efficiently.
Narrowing the Educational Achievement Gap
Children from homes whose incomes are in the bottom 10% of the country are as much as four years behind children from the wealthiest homes, said Columbia’s Peter Bergman. While popular wisdom might suggest bringing more computers into the classroom, research doesn’t support this. Instead, Bergman and other researchers have found that students are easily distracted by their computers and that taking notes by hand leads to better focus and better retention of material than taking notes on a PC.
But technology can still play a role. Simple text messages from a school to parents have been shown to reduce absenteeism and missed homework assignments, Bergman found by studying 59 schools in two states. Also effective are carefully developed software applications, so-called computer-assisted learning, or CAL. These programs allow teachers to construct lessons tailored to individual students and guide them as they attempt to solve a problem. Researchers have found that CAL programs are more helpful in developing math skills than language arts, Bergman said.
While the potential market for educational technology is in the trillions of dollars, investment in the area is anemic.
Tory Patterson, a cofounder of Owl Ventures, notes that his company invests more in educational technology startups than any other venture firm. But his company’s fund is just $600 million, a sum he called “sad” in light of the enormous potential in the market. “Investors lost money in EdTech in 2000, and they have long memories. They’re afraid of getting burned again,” he said.
Can We Fix Financial Services?
Poorer people are not well served by the financial services industry, says Harvard’s Laibson. Simply put, the numbers don’t add up. Thrifty customers generate just $20 a year in revenue, but servicing their business costs the company $100 a year, he said. So the industry doesn’t target them as customers or develop products that would serve their needs, Laibson adds.
Complicating matters is the success of Vanguard, the giant of the industry, in dramatically reducing the cost of business. Vanguard’s competitive advantage makes other players even less interested in serving lower-income customers. Vanguard’s impact on financial services is analogous to that of Amazon on retail, said Arjan Schutte, founder and managing partner of Core Innovation Capital.
One would think that better financial education would help steer lower-income customers away from inappropriate products. But it doesn’t work. Customers with lower levels of financial literacy gravitate to products like high-interest credit cards and high-commission financial advisers, despite warnings. What’s more, the industry has little incentive to push them toward better-suited products because it hurts margins, the so-called curse of education, says Laibson.
According to the Harvard researcher, there is a path that would provide reasonable returns for banks and better deals for consumers: “A move toward multi-product financial firms that build reputations and loyal customers by acting as fiduciaries, automating basic financial advice, and accepting thin margins.” Consumers benefit by consolidating their accounts while business benefits from lower customer acquisition costs and greater customer loyalty. And as those customers reduce their debt, they will be more likely to embrace higher-margin products, Laibson says.
Banks could make it even easier for customers to reduce their debt, Laibson added, by lowering limits to lines of credit, offering options to repay debt with automatic deductions from checking accounts, and restructuring existing debt, which makes it easier for consumers to pay what they owe.
Highlighting the challenges of finding solutions, Laibson’s proposals were met with a mixed reception. One member of the audience noted that poorer consumers simply don’t have the resources to embrace new financial products, while panelist Schutte of Core Innovation Capital dismissed Laibson’s proposal as “an academic pipe dream.”
The Innovation for Shared Prosperity Conference was presented by the Golub Capital Social Impact Lab, a research initiative that focuses on using digital technology and social science research to improve the effectiveness of leading social sector organizations.
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