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Economy

Issue of global income inequality takes stage at Milken conference

David Hunt said despite global economic progress, people in developed markets still feel vulnerable.

Socialism is coming, leading to a violent world without the liberties enjoyed by capitalist societies due to income inequality, according to a number of speakers including money managers at the Milken Institute Global Conference in Beverly Hills, Calif.

The theme of the conference, "Driving Shared Prosperity," held April 27 to May 1, was income inequality. The income gap is growing and the disparity is driving people away from capitalism, the speakers said. A solution to income inequality repeated often at the conference is to tailor education to meet the challenges of an ever-changing industrial landscape.

"The main theme I would say is that America is a rich country but it is not prosperous," said David Hunt, president and CEO of PGIM Inc., Prudential Financial Inc.'s asset management unit, speaking on a panel on "Time of Transition ... The Investors' View."

"We need to get to why it feels that way to many of us. ... We need to get to the right diagnosis of the problem. I do think that income inequality, while important, is too narrow."

Income inequality is only one aspect. Over the past 30 years, the movement toward greater capitalism, relatively open trade and free capital has moved 2 billion people out of poverty around the planet, Mr. Hunt noted.

"From a full ... global perspective, inequality is getting better and better and better," as every year 165 million join the middle class and more people join the upper echelons, Mr. Hunt said. "But it doesn't feel that way in the developed markets," he added.

He attributed the malaise in the developed markets to a combination of income inequality and a loss of hope. People are losing hope because children will not be as well as off as their parents, the American economy has lost its dynamism with lower small business formation and there is an increase in the sense of vulnerability. He noted that 40% of adults in the U.S. cannot cover a $400 unexpected expense, quoting from the results of the Federal Reserve's Report on the Economic Well-Being of U.S. Households in 2017 released in May 2018.

Tom Finke, chairman and CEO of Charlotte-N.C.-based Barings LLC, who spoke on the same panel, said that industry, including financial services and health care, need to take the lead. "We have to be more aware of the inequity in incomes and the disruption that the secular changes in jobs and technology and training are occurring," he said. "In many respects, if we wait for the political systems to figure it out, we are going to only be falling further behind. Industries in financial services and health care and others need to lead this time, and we need to help society manage these changes."

Education is the key and there is a role for business to play in educating people with the skills such as data science that companies need, Mr. Finke said. Training can start at the primary school level to prepare youth "for the real world," he said. There is a need for companies to invest more money in education, he added.

Public-private partnerships

Relationships are changing and there are new public-private relationships that are being struck.

Populism as a theme is not a bad thing, said Lara Warner, group chief risk officer, Credit Suisse Group AG, who also spoke on the same panel. "In fact, Europe, interestingly enough, to the degree they have become majority populism, we may start to get policies we can all get behind."

Ms. Warner said there is a need for public-private partnerships in education as well.

If it weren't for President Franklin D. Roosevelt, the U.S. might be a socialist country, said Scott Minerd, chairman of investments and global chief investment officer of Guggenheim Partners LLC. He said that colleges and universities should "endorse Mike Milken's idea of a free college tuition."

Bernie Sanders, an independent senator from Vermont and presidential candidate who calls himself a democratic socialist, doesn't know history, said Ken Griffin, founder and CEO of hedge fund firm Citadel LLC in a discussion with Michael Milken, founder and chairman of the Milken Institute and former head of high yield at now-defunct Drexel Burnham Lambert. Mr. Milken in 1990 pleaded guilty to six felony counts of breaking federal securities law and paid $600 million in restitution. He founded The $98 million Milken Family Foundation in 1982.

Venezuela was a rich capitalist country in the 1950s and today the people there are starving under a socialist regime, Mr. Griffin said. Quoting former British Prime Minister Margaret Thatcher, he said, "Every free society in the world is a capitalist society."

He said that in the U.S., blue states and red states are converging. Blue states embrace more regulation and taxes. The policies and programs of blue states are financially unsustainable, Mr. Griffin said — for example, people are fleeing Chicago due to the corruption. Failed policies result in corruption, cronyism and crime like in Chicago, he said.

"Where we see the government involved in subsidization (such as the first-time buyers' credit for homes) is where we see the economy break down," Mr. Griffin said. "If you look at student loan lending … the cost of college education has exploded since the government became involved. … Students are disillusioned with their economic prospects because the debt they are saddled with thanks to the U.S. government. ... Obamacare has clearly failed. Millions lost doctors and ready access to health care."

In a separate panel discussion also moderated by Mr. Milken, Robert Smith, chairman and CEO of private equity firm Vista Equity Partners Management LLC, underscored his own journey and spoke about the disenfranchisement of African Americans. Schools and communities are as segregated as much now as they were in the 1950s, he said.

"If we don't change that, we will have an issue," he said. The African-American community is more and more exposed to systemic underdevelopment, he added.

He favors a partnership between government and the private sector to solve the issues facing Americans.

"I like the idea of rearchitecting the American dream," he said. "Private-public partnerships … working with companies (and) government to make it happen."

Broad agenda

Other topics at the conference focused on how institutional investors are balancing their liabilities, the growth in the number of private companies as well as risks to portfolios of climate change and ESG factors such as the imbalance of women and minorities to white males on both corporate boards and investment positions at money management firms.

"People focus so much on assets (but) that's the second part," said Christopher Ailman, CIO of the $227.8 billion California State Teachers' Retirement System, West Sacramento, during a panel discussion that he moderated.

Institutional investors' investment strategies are informed by the nature and extent of their future liabilities, he said.

Kim Lew, CIO of Carnegie Corp. of New York's $3.5 billion foundation, said on the same panel that the foundation is required to give away 5% each year, which means the foundation's assets are highly variable.

Some 35% of the foundation is in private investments, she said, and 20% of that private investment portfolio is unfunded commitments, Ms. Lew said.

The foundation is 100 years old and aims to be 200 or 300 years old, she noted. "Arguably, we have an unlimited time horizon."

For Japan's $1.6 trillion Government Pension Investment Fund, one of its challenges lies in its size, said Hiromichi Mizuno, executive managing director and CIO of the Tokyo-based plan, speaking on the same panel.

"In the fourth quarter, we lost $150 billion," which is more than the size of most U.S. pension plans, he said. "GPIF owns the capital markets," he added. "We would not be able to beat ourselves because GPIF owns the market. … As a group, we (asset owners) own the capital market and so we need to make it a better place and a safer place to hold retirees' money."