TIME Economy

Starbucks For America

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Ian Allen for TIME

Howard Schultz is transforming his company. Changing the country is going to be harder

Howard Schultz isn’t afraid of his feelings. Or anybody else’s, for that matter.

The 61-year-old Starbucks CEO doesn’t mind tears or hugs or displays of emotion of any kind. This is front and center on an icy January afternoon in New York City, where Schultz is leading a forum on race. Shocked by recent police shootings and unrest in Ferguson, Mo., New York City and Oakland, Calif., he decided to hold open meetings in five cities where Starbucks employees from top managers to entry-level baristas could speak frankly about their experiences with racism.

A little more than 40% of the company’s baristas are minorities, and the audience of 400 or so at Cooper Union’s auditorium reflects that. Schultz has just come from a meeting with New York City police commissioner William Bratton in which the two discussed ways the company could help ease tensions. Like a candidate holding forth during a televised town hall, Schultz is speaking from a spot on the floor near the crowd. “People have told me we shouldn’t touch this issue, that we might stir things up, upset the shareholders. I don’t agree with that,” he says. “Conversations are being ignored because people are afraid to touch the issue. But if I ignore this and just keep ringing the register, then I become part of the problem. So here we are. Let’s talk.”

Pretty soon, the floodgates are open. The microphone is passed around, and dozens of partners, as Starbucks employees are called, begin sharing their stories. Some are crying, others angry. A young Senegalese immigrant, Tafsir Mbodje, a district manager who runs the Grand Central store among others, points out the slow police-response times in his former neighborhood, East New York. “I feel like we are at a tipping point in this country,” Mbodje says. “And it’s only going to take one more thing, one more event, to make things boil over.” Schultz takes the microphone. “I was born in East New York, and I agree with you. We are at a tipping point. There’s a lack of leadership in Washington, in government, and so it has to come from us.”

The forum is quintessential Schultz. He is at his best with his people, talking about issues that other CEOs would rather not come up in mixed company. In recent years, Schultz has taken on student debt, health care, veterans’ rights, youth unemployment and gun violence. All this do-goodery can be hard to live up to 24/7. A progressive image can sting if it appears hypocritical, as it did in 2014 when a New York Times story chronicled how Starbucks’ staff-scheduling software could wreak havoc on the lives of workers with kids. (Schultz says the problem has since been fixed.) And though investors have cheered Starbucks’ recent performance–on Jan. 22, the Seattle-headquartered company said sales in the most recent quarter had grown by 13% year over year, to $4.8 billion–a CEO’s personal passions can irk investors when times turn tough.

Lately Schultz has been focused on one intractable problem in particular that will take more than a few feel-good forums to tackle: the future of the U.S. economy. The Great Recession and the recovery that followed have warped the economic landscape. What has emerged is an hourglass-shaped comeback with growth at the high and low ends and shrinking in the middle. Wealthy households have made huge strides while middle-income Americans struggle, reshaping businesses from housing and cars to groceries and clothing. Labor Department data show that wages for the vast majority of American workers have stagnated over the past decade. The U.S. is increasingly a nation of latte drinkers and latte makers, with very little room in between. Schultz, of course, depends on both.

His plan to address this, he tells TIME, could change your local Starbucks as you know it. Those changes also reflect the challenges facing the country as a whole. “Whether you’re a Republican or a Democrat,” he recently said, “we can all know and recognize one thing: the country is not going in the right direction.” That’s the kind of talk that had some, including Schultz’s powerful pals, wondering if these are the musings of an outspoken billionaire flirting with the idea of taking a run at the world’s most powerful job.

AMERICA IS “FRAGILE”

A few weeks back, when Starbucks released its impressive quarterly numbers, Schultz got up in front of a bunch of Wall Street analysts and gave them the bad news. “There is no company you can point to that is as dependent as we are on human behavior, the human condition and the people that wear the green apron,” he said. And unfortunately that condition is, as he put it, “fragile.” Schultz was referring to consumer sentiment, which, while improving, is still volatile. Spending can collapse at a moment’s notice, just as it did during the Ferguson riots, when coffee sales nationwide suddenly dipped as consumers hunkered down at home rather than going out and spending.

Schultz is acutely aware of this because four times a day, he gets what may be the most up-to-date consumer-confidence indicator in America–Starbucks’ coffee-sales figures. With nearly 12,000 stores nationwide, “we have a lens on almost every community in America,” he says. “At 4:30 in the morning, I wake up and see the numbers of basically every store from yesterday.” Those numbers give a picture that is very different from and much more sensitive than quarterly GDP figures. Over the past few years, says Schultz, they’ve pointed to a “fractured level of trust and confidence” that he attributes in large part to a sense that government is no longer functional and that no one is looking out for the welfare of the middle and working classes.

Sales will rise and fall with the national mood, tanking quickly during events like the New York City police protests–or the 2013 government shutdown, just one of the recent moments when Schultz has worried about the effects of partisan politics on the economy. “I called the White House after the government shutdown and shared with them [figures showing] that leading into the shutdown and for weeks afterward, we saw a significant drop in consumer spending.” He spoke to people “at the very highest level on both sides of the aisle” to stress his feeling that this effect would be “lingering” and would result in a more skittish consumer. “And that’s exactly what’s happened,” he says.

Starbucks–whose baristas, at Schultz’s suggestion, wrote come together on coffee cups in protest over the shutdown–already had a reputation at that point as a progressive company, having been one of the first retailers in the country to offer affordable, comprehensive health care to full-time and eligible part-time employees and their families, as well as a stock-grant program (Bean Stock) for all. And there have also been big pushes in areas like workforce training (the company and the Schultz Family Foundation together have trained nearly 700 disadvantaged young people for jobs in retail or customer service), hiring and training of returning veterans (Starbucks has pledged to employ 10,000), student debt and access to education (the company has promised to help pay for employees to get their bachelor’s degree, an investment that will likely cost Starbucks tens of millions of dollars).

Schultz says he is deeply invested in these ideas not only because making the company a preferred employer helps keep turnover costs lower and service quality higher than the industry average but also because he believes corporations have a duty to help people realize the American Dream. “I think the private sector simply has to take a larger role than they have in the past. Our responsibility goes beyond the P&L and our stock price. We have to take care of people in the communities that we serve. If half the country or at least a third of the country doesn’t have the same opportunities as the rest going forward, then the country won’t survive. That’s not socialism,” says Schultz. To him, it’s practical reality.

Schultz believes that keeping the economy viable will also require major changes in corporate business models, Starbucks’ included. And that’s where customers will begin to notice some changes. Just as fashion brands have haute couture and mass-market lines, Starbucks this year will open the first of a series of luxury Reserve stores, where customers can get a more rarefied and expensive assortment of coffee. (Some may also experiment with selling wine.) Expect many more specialized formats designed for specific places, like express stores coming to New York City or mobile trucks currently on college campuses. Over the next five years, Schultz will be busy transforming the Starbucks experience, in large part by experimenting with ways to draw in ever-more-fickle consumers.

In part, that will involve taking seriously the crowded space for cheaper coffee, a phenomenon that along with the financial crisis helped lead to a steep downturn in Starbucks’ fortunes in 2008. Starbucks will have to compete more directly not only with McDonald’s and Dunkin’ Donuts but also with budget outfits like 7-Eleven. (When even Taco Bell is advertising its coffee, you know things are getting tough.) You will start to see the mermaid logo near places like your local bowling alley. The firm that built its image on an “emotional” connection to coffee that allowed for personal indulgences like $5 mocha Frappuccinos is going to have to find ways to compete with those that sling bare-bones $1 coffee–and a lot of it. (Starbucks hasn’t decided yet how the menu might change.) The company is approaching this in a characteristically cool way–building outlets from used cargo containers at highway exits, for example–but it’s not going to be easy to make one brand mean two things to different customers.

More important, this change of course puts the company in an awkward position. To continue to grow, it must adapt to the economic landscape, making a play for high-end consumers with disposable income while also tailoring outlets and products to lower-end consumers who have less to spend. But doing this means Schultz is implicitly accepting a truth that he has been rallying against for years. That leaves Starbucks aggressively changing its business model to make the most of a country in which the middle class is shrinking while its outspoken CEO loudly cries out against the forces that shrink it. The future of Starbucks, like the economy itself, has a split personality.

KID FROM CANARSIE

This divide is not unfamiliar to Schultz. he grew up the watchful, working-class child of a depressed, blue collar father. The elder Schultz, a military veteran without health care who was driving a diaper truck in the days before disposables were ubiquitous, fell on the ice when Howard was little and was let go with no benefits or pay. He never recovered, physically or mentally. With Schultz’s dad couchbound and unable to work, the family struggled with poverty in the housing projects of Canarsie, Brooklyn. “I saw my father, who was unfortunately very bitter about his own life, not ever having the self-respect that he thought he deserved, because he was an uneducated blue collar worker,” says Schultz. “Consciously or unconsciously, I think one of the things I was trying to do was build the kind of company my dad never got to work for.”

That focus on the working poor is something that sets Schultz apart from many in the 0.001% of which he is now a part. (Forbes estimates his net worth at some $2.4 billion; famous friends include JPMorgan Chase CEO Jamie Dimon and Oprah.) His wife Sheri, an equally kinetic and emotive blonde who looks a little like actress Ellen Barkin, helps run the family foundation. She remembers humility and appreciation for people as the qualities that initially drew her to Schultz when the two met in a Hamptons house share 36 years ago. “You know how they say you can find out about a person when you’re in a restaurant and you see how they treat someone who helps you? He would be that guy who before he left would go to the boss and say how great the person was that served our dinner,” says Sheri. “That’s Howard.”

One Friday afternoon at the Camp Pendleton Marine base near San Diego, Schultz sits signing copies of For Love of Country, a book he co-wrote with Washington Post senior correspondent Rajiv Chandrasekaran about the struggles of returning veterans. A hundred or so people have lined up for copies, and Schultz is quietly scribbling his signature until a middle-aged man from Sunset Park, Brooklyn, strikes up a conversation. Within seconds the two are backslapping and joking about who came from the tougher neighborhood. “When you say you went to Canarsie High School, you get a whole new level of street cred!” boasts Schultz. He waves over his genteel-looking public-affairs director, Vivek Varma. “Hey, how long do you think Viv would last in the Bayview projects?” Schultz asks his new buddy. “With that watch?” the man fires back. “How fast can you run?” He and Schultz both double over laughing.

Schultz may be of the people, but he’s no saint. He’s more sensitive than most executives to criticism and tough questions. So much so that he has a tell: when he’s on the defensive, his eyes open wider than normal. And like many business leaders from hardscrabble backgrounds, he can be a control freak. Top staffers say multiple 5 a.m. emails from him aren’t unusual. Is that tough? I ask one lieutenant. “Only if you are a normal person who gets started at 8 a.m.,” he responds, a little weary. Schultz also has a tendency to parachute into situations, pre-empting members of his staff who are trying to do their jobs. He says he needs to combat his tendency to “override the people who are responsible. [It’s] not healthy for the organization.” One rare rich-guy move, Schultz’s purchase of the Seattle SuperSonics in 2001, ended with a very unpopular sale that relocated the team to Oklahoma City; Schultz was frustrated by the experience in part because he didn’t get as much control as he would have liked.

Schultz continues to push generous benefit packages for staff, despite protests from the Street. In 2008, when bankers wanted him to cut health care to make his margins, he refused. “We found that 70% of the people working for Starbucks did not have a college education,” Schultz says, “and a large percentage of them had started and stopped.” To solve that, he partnered with Arizona State University, which has an extensive online curriculum, to allow Starbucks employees to go to school on their own time while continuing to work. So far, 1,500 employees have taken up the offer (Starbucks says job applications have jumped too as a result), giving the notion of online education a boost in legitimacy and earning Schultz praise from both liberals and conservatives.

Grover Norquist, the right-wing tax activist, sees Starbucks as a model for a kind of business federalism in which the private sector does things better and faster than government. “Howard isn’t saying, Hey, I’ll give you a check. He’s saying, I want your skills, [at the same time] that he’s changing the cost of education by revolutionizing education itself. He’s backing into the reform of public education,” says Norquist, who also believes Starbucks’ lead on the veteran-hiring issue could displace entire departments of the federal government. “More people live close by a Starbucks than a VA office.”

HOWARD FOR PRESIDENT?

Inevitably, all the talk about a leadership void in Washington has led people to wonder whether Schultz might be privately positioning himself for public office. (He is a Democrat.) There is, after all, a rich tradition of wealthy businesspeople pushing political agendas, from Edward Filene, who started Filene’s Basement before helping develop community credit unions and pass the first workmen’s-comp law, to former eBay CEO Meg Whitman, who unsuccessfully ran for governor of California five years ago. People close to Schultz, like entertainment mogul David Geffen, have suggested he think big. “I first told Howard he should run back in 2008,” Geffen says. “We were having a very intense conversation about things that were happening in the country, and Howard had a strong point of view about various things,” like, for example, the bank bailouts. “We both felt there was a lot of corruption in government and a lack of conviction to put things right.”

Bill Etkin, a financier and lawyer who is a close friend of Schultz’s as well as a consultant for Starbucks, says the CEO did think seriously at one point about entering the political arena. Schultz and his wife hosted a dinner for Michael Bloomberg a few years back when the former New York City mayor was considering a run for President. The two discussed the challenges of moving from the business world to politics. Etkin says Schultz ultimately feels he can do more for the public good from his current perch than he could in Washington. Mellody Hobson, president of the $10 billion asset-management firm Ariel Investments and a Starbucks board member as well as an Obama campaign supporter, says, “Howard is a maverick, and mavericks don’t do well inside big institutional structures.” Norquist puts it more bluntly: “‘You should run for office’ is what people in this country say to you when they mean ‘I like your ideas. I wish people in Washington thought like you did.’ That’s what Ralph Nader’s friends said to him, and when he ran, they screamed at it and said, ‘Hey, you are funneling money away from the mainstream of the party!'”

For his part, Schultz insists he’s not interested in running for office at the moment and has neither the temperament to make the compromises necessary to embark on a Democratic political career nor the desire to be a third-party candidate. “I don’t think that is a solution. I don’t think it ends well.” There is also the baggage that every successful businessman turned politico has to carry in terms of translating his successes–and his failures–in one realm to another. In 2012, for example, Starbucks ran into PR trouble in the U.K. after revelations that it had paid only minimal corporation taxes on many hundreds of millions of dollars in sales. The company, which had been domiciling in the Netherlands, as many large companies do, says it complied with all tax laws. Starbucks has since voluntarily paid more, and it has moved its European headquarters to the U.K. Still, the episode shows how difficult it would be to balance running a multinational company with running a progressive political campaign. For now, Schultz says, he’s content to “see what Hillary does.”

Whatever his future ambitions, Schultz is caffeinated and eager to do bold things both for his business and for the country at large. Wherever he goes, he pops into Starbucks stores, sometimes recognized, often not. “Hey, how is that Pumpkin Spice Latte doing?” he asks the somewhat shocked manager of a store in San Diego, where he has made a surprise visit for his fifth Sumatra of the day between meetings with veterans’ groups. Baristas scramble to fill the order, looking a little awestruck. “Maybe we should move the holiday display cards up a few inches?” Schultz offers.

Schultz is busy mapping Starbucks’ future. The company recently announced the hiring of a new No. 2, 16-year Microsoft veteran Kevin Johnson, to help lead a push into mobile payments. Through its smartphone app, Starbucks already does more of those per week than any other retailer, and Schultz has visions of competing with the likes of Apple Pay. In Seattle, Schultz just opened a flagship Starbucks Reserve Roastery and Tasting Room, a Willy Wonka–esque coffee fantasia where customers can watch every part of the coffeemaking process, from bean roasting to foammaking. A hundred high-end Reserve stores are coming in the next five years to cities including Chicago, Los Angeles, New York, San Francisco and Washington. And Starbucks says customers in some cities will be able to get their caffeine fix delivered to their door by the end of 2015.

There will be challenges along the way. Aside from the bargain-basement competitors, Schultz will have to keep his eye on a raft of high-end bespoke coffee chains trying to re-create Starbucks’ early formula, including Blue Bottle, based in Oakland, Calif. Other enthusiastically unveiled initiatives, like a push into food, have been hit or miss. Schultz’s founder’s passions still burn, but he has a hard road ahead in the split economy, and the future of Starbucks after him is unclear at best.

On the policy front, the company is planning to dramatically ramp up the number of out-of-work young people, veterans and other struggling groups that get workforce training through Starbucks. On Feb. 9 in L.A., Schultz is holding the company’s first open forum on racism with non-Starbucks participants. Meanwhile, the early-morning emails with the next big idea–to staffers, friends, his wife, other CEOs–are unlikely to stop coming anytime soon. “I like to take big swings,” says Schultz, smiling and chugging yet another Sumatra. “Maybe it’s all the coffee.”


This appears in the February 16, 2015 issue of TIME.
TIME Davos

Down and Out in Davos

Why the world’s powerful are worried about 2015

It’s a perennial question: What is the World Economic Forum (WEF) actually good for? The annual confab of the world’s rich and powerful in Davos, Switzerland, has evolved significantly in the past few decades, from a gathering of hardcore economists and financiers to a broader forum for the discussion of ideas ranging from the role of women in the workplace to the future of the Internet. In my opinion, it’s still the best place on earth to get a sense of what global decisionmakers will be thinking about in the year ahead. I made my way around the Magic Mountain listening to bankers, executives, policymakers and world leaders, and here’s what I found.

Tech Brings Bad With Good

Digital Disrupters and Web Pioneers–Google executive Chairman Eric Schmidt, Yahoo CEO Marissa Mayer and Facebook COO Sheryl Sandberg among them–were out in force as always, extolling the virtues of concepts like the “Internet of things,” which could create entirely new markets. But average people don’t necessarily share their enthusiasm for, and abiding faith in, tech. The Edelman Trust Barometer report, a 27-country survey measuring confidence in the public and private sectors that was released during the conference, found that the majority of the world’s consumers think technological change is moving too fast for them. By a margin of 2 to 1, people don’t believe that governments or businesses are thinking enough about the broad societal impact of developments like social media, digital security, genetically modified foods and fracking. Technology for technology’s sake, most people feel, is not a good thing.

That, in part, may be because the gains made possible by technology over the past decade or so have been unevenly shared. A WEF white paper prepared by the Swiss bank UBS found that sectors boosted by new technologies, such as finance and manufacturing, “have delivered a large share of U.S. economic growth without adding significant numbers of new jobs.” Smarter software and the advent of such innovations as 3-D printing are making some people very wealthy. But technological advances have done comparatively little to replace the middle-class jobs lost over the past couple of decades.

How to explain the divide? Technologists like MIT’s Andrew McAfee, who made waves at Davos last year with a book he co-wrote, Race Against the Machine, would argue that the scope of the digital revolution is so massive that it will destroy more jobs before it starts creating them and that the broader growth-enhancing effects of technology will simply take longer to be felt. As the UBS paper notes, it took around 50 years for the benefits of electricity to completely filter through the economy. Still, for a civilization that reflexively looks to technology to deliver us from seemingly unsolvable predicaments, this is a worrisome trend.

Global Growth May Be in Peril

We need that broader tech boom to goose productivity. Globally, productivity grew at a good clip over the past half-century, rising 1.7% a year. But as countries become more developed, productivity growth slows. One of the most sobering presentations, given by the consulting giant McKinsey, made the point that when you combine slower productivity with a dramatic decrease in the global birth rate, you get economic growth that could be much lower over the next 50 years than it has been in the past 50.

Economic growth is basically a function of the number of workers and their productivity. The former is falling sharply as countries get richer and women have fewer children, and the latter is more or less stagnant. “It’s as if we’ve been flying a plane on two engines, and one of them is about to go out,” says James Manyika, head of the McKinsey Global Institute. If current trends continue, McKinsey projects that global growth will slow to about 2.1% a year, even as more people than ever have expectations of a middle-class life. Not a great formula for social stability.

Women and Children First

People can keep praying that technology will produce more middle-class jobs, but there is one proven solution for boosting economic growth: putting more women to work. The picture of gender parity from Davos is never great; this year, the meeting had a record 17% female participation, up from 9% in the early 2000s. One WEF study found that at the current rate of change, it would take women 81 more years to reach economic equality with men.

Ironically, this seems to have created a cottage industry in gender-parity consulting. Employees of both sexes from firms like Mercer and Ernst & Young were at Davos hawking strategies about how to promote women. My advice: think less about leaning in and more about how to help families create support structures that allow more women to work. Warren Buffett once suggested to me that the U.S. government should offer subsidized child care, allowing caregivers (mostly women) to earn a better wage while freeing women who are higher up the educational food chain to take bigger jobs. It remains one of the best policy proposals I’ve ever heard.

Plenty of Band-Aids, Not Many Cures

Of course, that would require action from politicians, something that everyone agrees is in short supply. The divide between the fortunes of global markets (which have remained surprisingly buoyant) and national economies (which are sluggish in many parts of the world) was a big topic yet again. In the middle of the WEF meeting, the European Central Bank (ECB) launched its version of quantitative easing, a $1.3 trillion bond-buying program of the type that the U.S. Federal Reserve–which bought some $4 trillion in assets over the past few years–has only just reined in. It is an effort to help Europe avert another recession, and markets responded instantly, with European stocks rising, bond yields falling and the euro weakening, which should help exports.

While many at Davos were grateful for the uptick in their portfolios, some high-profile financiers fretted that the ECB’s move comes with a downside that will thwart a lasting solution to the European debt crisis. As hedge funder Paul Singer put it to me, “The QE program takes the pressure off European leaders to take the fiscal, tax, regulatory, trade, education and other steps necessary to generate real sustainable growth. [ECB president] Mario Draghi is an enabler, because the money printing enables the Presidents and Prime Ministers to avoid making real structural reforms.”

Polarized politics on both sides of the Atlantic has made it hard for governments to make the sorts of moves that create real growth. (The recent Greek elections won’t change much there.) So central bankers have kept the easy money flowing to give countries more time. But the emerging-market crises of the 1980s and ’90s teach us that printing money isn’t a substitute for fixing structural problems. If you do one without the other, the market will punish you viciously later on.

And all that easy money has exacerbated the growth of inequality globally, since most of it has gone to pumping up stocks, which are mainly held by the top 25% of the population. Wages remain stagnant and middle-class jobs elusive. That divide, which reflects the one between Davos and everywhere else, is what we’ll be grappling with in the year ahead.


This appears in the February 09, 2015 issue of TIME.
TIME Economy

Europe’s Economic Band-Aid Won’t Cure What Really Ails It

Prime Minister David Cameron Tries To Take A Harder Line with Europe
Carl Court—Getty Images E.U. flags are pictured outside the European Commission building in Brussels on Oct. 24, 2014

Quantitative easing is a good start, but it won't fix the Continent's underlying wounds

Markets always love a money dump, which is why European stocks are now rallying on news that the European Central Bank will purchase 1.1 trillion worth of euro-denominated bonds between now and September 2016. Bond yields are dropping, implying less risk in the European debt markets. And the value of the euro itself is falling, which should make European exports more competitive, which could in turn bolster the European economy over all.

All good, right? For now, yes, it is all good.

But let’s remember that central bank quantitative easing (QE) of the kind that Europe is now embarking on is always just a Band-Aid on economic troubles, not a solution to underlying structural issues in a country (or in this case, a region). Just as the Fed’s $4 trillion QE money dump bolstered the markets but didn’t fix the core problems in our economy—growing inequality, a high/low job market without enough work in the middle, flat wages, historically low workforce participation—so the ECB QE will excite markets for a while, but it won’t mend the problems that led Europe to need this program to begin with.

Those consist primarily of a debt crisis stemming from the lack of real political integration within the EU. Right now, Europe has a currency and an economic union that exists in a kind of fantasy land, with no underlying political unity. Until the Germans start acting more European (meaning creating a consumption society and realizing that they’ll have to do some fiscal transfers to struggling peripheral nations in exchange for the huge export benefits they get from the euro), and countries like Spain, Italy, Portugal and France start making the changes they really need (all the usual stuff—labor market reforms, cutting red tape, fighting corruption, opening up service markets), the debt crisis won’t go away.

Indeed, the challenge now is for countries is to use the breathing room that the ECB has given them to really come together over the next 18 months and make those reforms happen while committing to a truly integrated Europe. Germany should say it will unequivocally back peripheral nations financially in exchange for a promise of real reforms in those nations. (There should also be tough penalties for failure on both sides of the bargain.)

That will be tough for sure, but Europe will find itself in an even worse place come September 2016 if it doesn’t take action now. Post QE, without any real structural reform, the EU will simply have an even more bloated balance sheet, and the market will exact punishment for it. For a historical lesson on this, look to the many emerging market crises of the past where countries tried to spend themselves out of their problems without doing underlying reforms; it always ends in a stock market crash, a financial crisis, and plenty of tears.

The buck has stopped for Europe. The ECB has called policy makers’ bluff. It’s time to create a real United States of Europe to match the common currency.

TIME Davos

The Coming Crisis Making the World’s Most Powerful People Blanch

TIME.com stock photos Money Dollar Bills
Elizabeth Renstrom for TIME

If global growth slows, as some predict it will, the globe is in for a lot of very big problems

The past 50 years have been the most exceptional period of growth in global history. The world economy expanded sixfold, average per capita income tripled, and hundreds of millions of people were lifted out of poverty. That’s the good news. But according to a new McKinsey report on the next 50 years of global growth revealed today at the World Economic Forum in Davos, it’s very unlikely that we’ll be able to equal that in the future. There are two main reasons for this gloomy conclusion: the global birthrate is falling dramatically and productivity is slowing. Economic growth is basically productivity plus demographics. The result? McKinsey is forecasting that if current trends continue, global growth will fall by 40% over the next half century, to around 2.1% year.

A while back, I wrote a column about what a 2% economy would mean for the U.S. Imagine if the whole world, including emerging markets that need much higher rates just to keep social unrest under control, were growing that slowly too. Not good.

McKinsey got a bunch of big brains—Larry Summers, Martin Sorrel, Martin Wolf, Laura Tyson, Michael Spence, and others—together to discuss all this and figure out some possible solutions. A few interesting points that came out: while we are in the middle of a digital revolution that seems to be disrupting nearly every aspect of business and the economy, not to mention our personal lives and culture, the revolution isn’t showing up in productivity numbers yet. Part of that could be that the way we measure productivity isn’t capturing everything that individuals are doing on their smartphones, tablets, and other gadgets. (It’s also worth noting that a lot of what is being created by individuals on those devices is free, which is an economic problem all its own, in the sense that only a few big companies like Facebook and Google and Twitter capture those creative gains, and they don’t create enough jobs to sustain what’s being lost in the economy.) There’s also the possibility that this “revolution,” simply isn’t as transformative, at least in terms of broadly shared economic growth, as those of the past—the Industrial Revolution or even the 1970s computer revolution. (For more on this, check out research by Northwestern University academic Robert Gordon, who is all over this topic.)

There are things we can do to boost productivity, like getting the private sector more involved in areas like education (for more, see The School That Will Get You a Job), and by allowing the gains from the internet of things (meaning the connection of all digital devices to each other) to filter through over the next few years. It’s not yet clear that will create more jobs though. Indeed, it may create jobless productivity which is a whole new challenge to cope with, one that might require bigger wealth transfers from the small number of wealthy people who do have jobs to the larger number of people who don’t. (Paging Thomas Piketty!)

There are some other ideas on the demographic side. Women are still dramatically underrepresented in the workforce in many countries. (One WEF study estimates it will take 81 more years for global gender parity at the current rate of change—argh!) Putting more of them to work could help a lot with growth; indeed, Warren Buffet once suggested to be that the federal government should provide inexpensive, partly federally funded child care to allow other women to take jobs higher up the food chain, this boosting economic growth. A win win.

Of course, this requires governments to take the lead on what can be politically contentious policy decisions, not easy when most politicians spend much of their terms trying to get reelected. Unfortunately short-termism is rife in the private sector too. CEO tenures are now five years on average and CFOs only last 3. All of which tends to lead to decision-making that benefits corporate compensation more than real economic growth.

Depressing, I know. But I saw one ray of hope when I ran into an emerging market CEO outside the panel, one who runs a family business that does planning in 10- to 20-year cycles rather than quarterly, investing quite a lot in areas like training and education. McKinsey research shows these types of firms will make up the biggest chunk of new global multinationals. Perhaps they can take the long view and come up with some better ideas about how to ensure global growth for the future.

TIME Davos

How Technology Is Making All of Us Less Trusting

A technician checks the light in the Congress Hall before the start of the annual meeting of the World Economic Forum (WEF) 2014 in Davos Jan. 21, 2014
Denis Balibouse / Reuters

The world's major tech companies better pay attention to the growing backlash — before it's too late

Davos Man, take note: the technology that has enriched you is moving too fast for the average Joe.

That’s the takeaway from the 2015 Trust Barometer survey, released by public relations firm Edelman every year at the World Economic Forum in Davos. This year’s survey, which came out Wednesday, looks at thousands of consumers in 27 countries to get a sense of public trust in business, government, NGOs and media. This year, it’s falling across the board, with two-thirds of nations’ citizens being more distrustful than ever of all institutions, perhaps no surprise given that neither the private nor the public sector seems to have answers to the big questions of the day — geopolitical conflict, rising inequality, flat wages, market volatility, etc.

What’s interesting is how much people blame technology and the speed of technological change for the feeling of unease in the world today. Two to one, consumers in all the countries surveyed felt that technology was moving too quickly for them to cope with, and that governments and business weren’t doing enough to assess the long-term impact of shifts like GMO foods, fracking, disruptors like Uber or Apple Pay, or any of the myriad other digital services that affect privacy and security of people and companies.

That belies the conventional wisdom among tech gurus like, say, Jeff Bezos, who once said that, “New inventions and things that customers like are usually good for society.” Maybe, but increasingly people aren’t feeling that way. And it could have an impact on the regulatory environment facing tech companies. Expect more pushback on sharing-economy companies that skirt local regulation, a greater focus on the monopoly power of mammoth tech companies, and closer scrutiny of the personal wealth of tech titans themselves.

Two of the most interesting pieces of journalism I have read in recent years look at how the speed of digital change is affecting culture and public sentiment. Kurt Andersen’s wonderful Vanity Fair story from January 2012, posited the idea that culture is stuck in retro mode — think fashion’s obsession with past decades, and the nostalgia that’s rife in TV and film — because technology and globalization are moving so fast that people simply can’t take any more change, cognitively at least. Likewise, Leon Wieseltier’s sharp essay on the cover of the New York Times book review this past Sunday lamented how the fetishization of all things Big Tech has led us to focus on the speed, brevity and monetization of everything, to the detriment of “deep thought” and a broader understanding of the human experience.

I agree on both counts. And I hope that some of the tech luminaries here at Davos, like Marissa Mayer, Eric Schmidt and Sheryl Sandberg, are paying attention to this potential growing backlash, which I expect will heat up in the coming year.

TIME Davos

What Obama and Davos Plutocrats Have in Common

A logo sits on a glass panel inside the venue of the World Economic Forum (WEF) in Davos, Switzerland on Jan. 19, 2015.
Chris Ratcliffe/Bloomberg—Getty Images A logo sits on a glass panel inside the venue of the World Economic Forum (WEF) in Davos, Switzerland on Jan. 19, 2015.

Global wealth has changed dramatically. It's time our tax code should, too

If President Obama’s State of the Union speech Tuesday night and the chatter at the World Economic Forum in Davos, which opened Wednesday, are any indication, inequality will be the hot economic topic for another year running.

The president’s proposals for changes to parts of the US tax code that mainly benefit the wealthy revives the conversation Warren Buffett started a few years back with his op-ed about why his secretary pays a higher tax rate than he does. (Answer: She works for wages, whereas the Oracle of Omaha earns money on money itself, in the form of capital gains, interest income, etc.) At the WEF in Davos, where world leaders meet every year to hash out the big geopolitical and economic issues of the day, one of the most talked about reports is Oxfam’s new brief looking at how the 85 richest people on the planet have the same amount of wealth as the poorest 50%, a huge jump from last year when it took a full 388 plutocrats to equal that wealth. Some 20% of the billionaires come from the world of finance and insurance, a group whose wealth increased by 11 % in the last twelve months. And $550 million of it was spent lobbying policy makers in places like Washington, something Oxfam believes has been a major barrier to tax and intellectual property reform that creates a fairer economic system.

Plenty of those plutocrats are here on the Magic Mountain, and some are undoubtedly checking in with their tax planners. I expect that we’ll hear lots more in Davos this week about how to restructure tax codes for the 21st century, mainly because the nature of wealth and how it gets created has changed so dramatically. Today, more than ever since the Gilded Age, money begets money; income earned from wages has been stagnating for years, or decades even, depending on which type of workers you tally. Meanwhile, changes in the tax code and corporate compensation over the last 30 years or so has concentrated more financial resources at the very top of the socio-economic food chain. Indeed, financial assets (stocks, bonds, and such) are the dominant form of wealth for the top 0.1 %, which actually creates a snowball effect of inequality.

As French economist Thomas Piketty explained so thoroughly in his now famous 693 page tome on wealth inequality, Capital in the 21st Century, the returns on financial assets greatly out-weigh those from income earned the old-fashioned way—by working for wages. Even when you consider the salaries of the modern economy’s super-managers—the CEOs, bankers, accountants, agents, consultants and lawyers that groups like Occupy Wall Street railed against—it’s important to remember that somewhere between 30% to 80 % of their incomes are awarded not in cash but in stock options and stock equity. This type of income is taxed at a much lower rate than what most of us pay on the money we receive in our regular checks. That means the composition of super-manager pay has the booster-rocket effect of lowering taxes (and thus governments’ ability to provide support for the poor and middle classes) while increasing inequality in the economy as a whole.

MORE How 7 ideas in the State of the Union would affect you

It’s a cycle that spins faster and faster as executives paid in stock make short-term business decisions that might undermine long-term growth in their companies even as they raise the value of their own options in the near. It’s no accident that corporate stock buybacks, which tend to bolster share prices but not underlying growth (you know, the kind that creates jobs for you and me), and corporate pay have gone up concurrently over the last four decades. There are any number of studies that illustrate the intersection between the markets, our tax system, and wealth gap; one of the most striking was done by economists James Galbraith and Travis Hale, who showed how during the late 1990s, changing income inequality tracked the go-go NASDAQ stock index to a remarkable degree.

As Piketty’s work shows, in the absence of some change-making event, like a war or a Great Depression that destroys financial asset value, the rich really do get richer–a lot richer–while the rest of us become relatively worse off. One of the few levers that governments have to combat this trend is the tax code. While Piketty argues for a global wealth tax, something that will likely never happen, President Obama’s stab at capital gains taxes and trust taxes is probably just the opening round in a tax debate that will go on throughout this year, and into the 2016 presidential race.

I say, bring it on—given that the nature of wealth has changed, it’s high time the tax system should too.

TIME 2016 Election

This Could Be Hillary Clinton’s Economic Policy

A new report from her allies offers some 2016 clues

Hillary Clinton’s allies appear to be taking their first shot at framing an economic policy agenda for her presumptive 2016 presidential campaign, with a new report out Thursday from the Clinton-friendly liberal think tank Center for American Progress.

This report is very significant for many reasons. For starters, as I mentioned in my TIME column this week about how progressive Elizabeth Warren is pushing Clinton further left, the CAP report was spearheaded by former Clinton economic adviser and former Treasury Secretary Larry Summers. Like his predecessor Robert Rubin, this is a guy much better known for deregulating financial markets than worrying about the working classes. I think the report is a sign not only that Summers is trying to reinvent himself, but that wage stagnation and the plight of the middle class is going to be the key economic issue in the 2016 presidential race.

MORE 9 Times Hillary Clinton Has Taken a Stand

So, how does Hilary stack up on this front? The CAP report, which is quite extensive, has some very good ideas. Among my favorites are ideas for tax reform befitting an era in which so much of the world’s income comes from assets (stocks, capital gains, etc.) rather than from wages. See my article on Thomas Piketty, the author of the bestseller “Capital in the 21st Century,” which explains why that’s important.

There’s also a lot on educational reform and vocational training, both good ideas. Most important, the report lays out how other developed countries—like Canada and Australia, for example—do a better job keeping wages up than we do (it has a lot on international best practices that the U.S. might adopt).

But on that score, the report is also quite telling about Clinton’s potential Achilles heel in this election: the legacy of Clintonian market deregulation that was carried out by her husband, along with both Rubin and Summers. These are the guys that got rid of Glass-Steagall banking regulations that had kept the system safe for years (Rubin went to work for Citibank, which pushed that move, shortly after rolling back the regulation that allowed it to become the original Too Big To Fail bank). Yes, we’d still have financial crises with that regulation in place, but it would help stem some of them, and most important, the rollback is symbolic of how the Clintonian wing of the Democratic Party completely capitulated to the financial community—a battle that is still taking place today as Jamie Dimon rails against regulators and a Republican Congress attempts to roll back Dodd-Frank.

The CAP report has a few interesting ideas about helping change corporate governance to make companies think longer-term, but it goes very light on the key reason behind short-termism in the market: the financialization of American business, and the fact that finance, an industry that takes over 30% of corporate profits while creating only 6% of American jobs, calls the shots in corporate American today

This is going to be the biggest challenge for Clinton in 2016: how to distance herself from the money culture, but also how to really address the deeper root-to-branch shifts in our financial system, and the market system at large, that must happen in order to truly fix the wage and middle class issue.

Read next: Huckabee Explains Why His Next Campaign Will Be Different

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TIME politics

How Elizabeth Warren Is Yanking Hillary Clinton to the Left

Rana Foroohar is TIME's assistant managing editor in charge of economics and business.

She may not run, but she’s already exerting a gravitational pull

Elizabeth Warren, the famously anti–Wall Street Senator from Massachusetts, has become the lunar goddess of liberal politics. Just as the moon pulls the tides, Warren is slowly but steadily towing the economic conversation in the Democratic Party to the left. Witness the barn-burning speech she gave on the Senate floor in December, railing against the fact that lobbyists from Citigroup and other big banks had been allowed to squeeze a rider into the latest congressional budget bill that would make it easier for federally insured banks to keep trading derivatives, which Warren Buffett once described as the “financial weapons of mass destruction” that sparked the 2008 crisis. Then there was her opposition to President Obama’s most recent Treasury nominee, Antonio Weiss, a banker who Warren told me “has no background to justify his nomination other than working for a big Wall Street firm.” (Weiss dropped out shortly after Warren began denouncing him.) Couple that with her continued calls to break up the big banks and criticism of policies espoused by longtime Democratic economic advisers like Bob Rubin and Larry Summers, and you’ve the makings of a consequential gravitational pull.

Warren is more than just a dogged critic. The former Harvard law professor’s influence comes in large part because she’s tapped into an existential crisis on the left: namely, liberals’ belated anxiety over the capture of the Democratic Party by high finance, which began two decades ago. Ronald Reagan might be the President most closely associated with laissez-faire economics, but both Republicans and Democrats have frequently turned to finance to generate quick-hit growth in tough times, deregulating markets or loosening monetary policy rather than focusing on underlying fixes for the real economy. Shrugging and citing a market-knows-best philosophy to avoid difficult political decisions has been a bipartisan exercise for quite a long time now.

And the anxiety is deepened because democrats, like Republicans, bear blame for the financial crisis of 2008. Jimmy Carter deregulated interest rates in 1980, a move that pacified consumers and financiers grappling with stagflation but also helped set the stage for the home-mortgage implosion. In 1999, as President Bill Clinton’s Treasury Secretary, Rubin signed off on the Glass-Steagall banking-regulation death certificate, a move that many, Warren included, believe was a key factor in worsening the crisis. Loose accounting standards supported by many Democrats during the Clinton years also encouraged the growth of stock options as the main form of corporate compensation, a trend that French academic Thomas Piketty, Nobel laureate Joseph Stiglitz and many other economists believe exacerbated the staggering gap between rich and poor in the U.S. today. I asked Warren whether she blamed such policies for our current wage stagnation, which has persisted despite robust economic growth. “I’d lay it right at the feet of trickle-down economics, yes,” she says. “We’ve tried that experiment for 35 years, and it hasn’t worked.”

Speculation has been rife that Warren might consider a presidential run of her own, taking on front runner Hillary Clinton just to make sure the same trickle-down team doesn’t end up in office again. When I ask her flatly if she’d run if she thought a Rubin or Summers would be making economic policy for the next four years, she paused. “I tell you … I’m going to do everything I can. I’m going to fight as hard as I have to. This has to change.”

Change won’t come easily. Resetting the economic table is not just about breaking up big banks or raising the minimum wage. Real change would mean grappling with a deep, multidecade shift from a society in which the state, the private sector and the individual all shared responsibility for economic risks to one in which individuals are now increasingly left on their own to pay for the trappings of a middle-class life–health care, education and retirement–while corporations capture a record share of the country’s prosperity without necessarily reinvesting in the common good. Complaining about too-big-to-fail banks, sleazy lobbyists and the 1% is easier than crafting an entirely new, inclusive growth policy.

Warren is likely to conjure more change by being a progressive foil to Clinton than by running herself. Her sway has old economists scrambling to learn new tricks. The Center for American Progress, a think tank with close ties to the Clintons, is releasing a new report on wages and the plight of the middle classes on Jan. 15. Its chief author: none other than Summers. Meanwhile, Clinton recently took an ideas meeting with Stiglitz, once considered too far left to touch. In politics, stars may rise, but the moon is constant.


This appears in the January 26, 2015 issue of TIME.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

TIME Economy

5 Global Risks You Should Care About Right Now

From Left: Ian Bremmer President and Founder of Eurasia Group, Nouriel Roubini, Chairman and Co-Founder of Roubini Global Economics and Rana Foroohar, Assistant Managing Editor at TIME speak on global politics and the economy at the Time & Life Building in New York City on Jan. 13, 2015. (Adam Glanzman for TIME)
Adam Glanzman for TIME From Left: Ian Bremmer President and Founder of Eurasia Group, Nouriel Roubini, Chairman and Co-Founder of Roubini Global Economics and Rana Foroohar, Assistant Managing Editor at TIME speak on global politics and the economy at the Time & Life Building in New York City on Jan. 13, 2015.

From Russia and China back to America

Ian Bremmer, the head of Eurasia Group, and Nouriel Roubini, the founder of Roubini Global Economics, are two of the world’s preeminent risk forecasters. They joined me Tuesday morning at the offices of Time Inc. for our yearly look ahead about what you should—and shouldn’t—worry about in the geopolitical and economic landscape for 2015.

Here are my top 5 takeaways from the conversation:

Russia is being underplayed as a major political risk, especially for Europe

Yes, we’ve all followed the conflict in the Ukraine. But according to Bremmer, there’s a good chance that petro-autocrat Vladimir Putin will become even more dangerous and unpredictable as oil prices plummet, stirring up more trouble abroad (possibly in other border states) in order to keep attention at home off the total collapse in the Russian economy. The European Union-United States divide over how best to handle Russia and Putin also underscores a transatlantic relationship that is becoming even more polarized.

America is becoming more unilateral, but not in the ways that you might think

Economically and politically, the U.S. is decoupling from the rest of the world. As Roubini pointed out, America is the one bright spot on the global economic map this year, with a solid recovery that could well have it growing faster than many emerging markets. On the other hand, there’s also a sense that the U.S. is withdrawing politically from the rest of the world, heightened by President Barack Obama’s absence this week from the Paris anti-terrorism rally (Bremmer believes this was a public relations blunder, not purposeful). That’s not the right way to think of it, says Bremmer. “The U.S. is projecting power through an arsenal of disparate mechanisms that allow is more easily to act alone,” including everything from drones to economic statecraft including more freezing of assets of problematic nations (think Russia or Iran), a strategy that Bremmer dubs “the weaponization of finance.”

Low oil prices won’t last forever

Both Roubini and Bremmer feel that the conventional wisdom about the Saudis keeping the pumps going and depressing prices in order to stick it to rivals Iran and Russia is wrong. “This is about economics,” says Roubini, who believes that the Saudis are simply trying to push competitors (including U.S/ shale producers) out of the market and that they’ll start pumping more oil once the marketplace is clear. While the impact for American homegrown shale could be bad in the short term, it will be outweighed by the consumer effect of lower prices (witness gas falling below two bucks a gallon in some parts of the country).

China is still a big mystery

It’s slowing economically, that’s for sure. But is President Xi Jinping’s massive consolidation of power a sign that the country is about to undergo pro-market reforms of the type that it hasn’t seen since the days of Deng (something that China watchers hope will vault the country into the middle-income bracket and help it create more jobs)? Or is it rather a sign that China is going back to the scary days of Mao, when dissent of any kind could land you in jail or worse? Bremmer is hopeful that China can make the middle market leap and maintain social stability. Roubini (like me) is less bullish, and feels that the country’s economic model is still based on cheap labor and cheap capital (it’s worth noting it takes four dollars of debt to create every dollar of growth in China these days, which is not good). Both agree that 2015 will be a crucial pivot year for China.

Bifurcation, polarization, inequality and volatility are the buzzwords for 2015

Politically and economically, old alliances are fracturing and new ones are being formed. Sectarian conflict in the Middle East and North Africa region will get worse before it gets better, Europe is headed toward a scary deflationary debt spiral that’s galvanizing far-right politics (witness Marine Le Pen’s rise in France), and China’s slowdown and the fall in oil prices is rejiggering the geopolitical landscape. Markets will be skittish this year—so fasten your seatbelts.

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