Top Quotes: “Saving Capitalism: For the Many, not the Few” — Robert Reich
Introduction
“Markets depend for their very existence on rules governing property (what can be owned), monopoly (what degree of market power is permissible), contracts (what can be exchanged and under what terms), bankruptcy (what happens when purchasers can’t pay up), and how all of this is enforced.
Such rules don’t exist in nature. They must be decided upon, one way or another, by human beings. These rules have been altered over the past few decades as large corporations, Wall St, and wealthy individuals have gained increasing influence over the political institutions responsible for them.
Simultaneously, centers of countervailing power that between the 30s and late 70s enabled America’s middle and lower-middle classes to exert their own influence — labor unions, small businesses, small investors, and political parties anchored at the local and state levels — have withered. The consequence has been a market organized by those with great wealth for the purpose of further enhancing their wealth. This has resulted in ever-larger upward pre-distributions inside the market, from the middle class and poor to a minority at the top. Because these pre-distributions occur inside the market, they’ve largely escaped notice.”
“The simultaneous rise of both the working poor and non-working rich offers further evidence that earnings no longer correlate with effort.”
“The solution isn’t to create more or less government. The problem isn’t the size of government but whom the government is for. The remedy is for the vast majority to regain influence over how the market is organized. This will require a new countervailing power, allying the economic interests of the majority who haven’t shared the economy’s gains. The current left-right battle pitting the ‘free market’ against government is needlessly and perversely preventing such an alliance from forming.
The biggest political divide in years to come won’t be between Republicans and Democrats. It’ll be between the complex of large corporations, Wall St banks, and the very rich that has fixed the economic and political game to their liking, and the vast majority who, as a result, find themselves in a fix. My conclusion is that the only way to reverse course is for the vast majority who now lack influence over the rules of the game to become organized and unified, in order to re-establish the countervailing power that was the key to widespread prosperity 5 decades ago.”
“A market — any market — requires that government make and enforce the rules of the game. In most modern democracies, such rules emanate from legislatures, administrative agencies, and courts. Government doesn’t ‘intrude’ on the ‘free market.’ It creates the market.
The rules are neither neutral nor universal, and they aren’t permanent. Different societies at different times have adopted different versions. The rules partly mirror a society’s evolving norms but also reflect who in society has the most power to make or influence them. Yet the interminable debate over whether the ‘free market’ is better than ‘government’ makes it impossible for us to examine who exercises this power, how they benefit from doing so, and whether such rules need to be altered so that more people benefit from them.
Other decisions govern unpaid debts: Big corporations can use bankruptcy to rid themselves of burdensome pension obligations to their employees, for example, while homeowners can’t use bankruptcy to reduce burdensome mortgages, and former students cannot use it to reduce burdensome debts for higher ed.”
“If a democracy is working as it should, elected officials, agency heads and judges will be making the rules roughly in accordance with the values of most citizens. As philosopher John Rawls has suggested, a fair choice of rule would reflect the views of the typical citizen who didn’t know they would be affected by its application. Accordingly, the ‘free market’ would generate outcomes that improved the well-being of the vast majority.
But if a democracy is failing (or never functioned to begin with), the rules might instead enhance the wealth of a comparative few at the top while keeping almost everyone else relatively poor and economically insecure. Those with sufficient power and resources would have enough influence over politicians, regulatory heads, and judges to ensure that the ‘free market’ worked mostly on their behalf.
This isn’t corruption as commonly understood. In the US, those with power and resources rarely directly bribe public officials in order to receive specific and visible favors, such as advantageous government contracts. Instead, they make campaign contributions and occasionally hold out the promise of lucrative jobs at the end of government careers. And the most valuable things they get in exchange are market rules that seem to apply to everyone and appear to be neutral, but that systematically and disproportionately benefit them.”
“Power and influence are hidden inside the processes through which market rules are made, and the resulting economic gains and losses are disguised as the ‘natural’ outcomes of ‘impersonal market forces.’ Ye as long as we remain obsessed by the debate over the relative merits of the ‘free market’ and ‘government,’ we have little hop of seeing through the camouflage.”
“As a practical matter, freedom of speech is the freedom to be heard, and most citizens’ freedom to be heard is reduced when those who have the deepest pockets get the loudest voice. Nowhere did the 5 members in the [Supreme Court] majority acknowledge the imbalance of power between big corporations increasingly willing to finance vast political advertising campaigns and ordinary citizens. In practice, therefore, the freedom of speech granted by the court to corporations would drown out the speech of regular people without those resources.”
“Even in 21st-century America, an estimated 100,000 children are enslaved in the sex trade.”
“As White House intellectual property advisor Colleen Chien noted in 2012, Google and Apple have been spending more money acquiring and litigating over patents than on doing research and development.”
Healthcare
“Drug prices are high in America partly because, while other governments set wholesale drug prices in their countries, the law bars the US government from using its considerable bargaining power to negotiate lower costs. But the bigger reason drug prices are so high is that drugs are patented — and those temporary monopolies often last beyond when the patents are supposed to run out (now 20 years).
The Patent Office and the courts initially decided that products from nature couldn’t be patented. That’s why early vaccines, using viruses to build up the human body’s immunity, couldn't become the private property of drug companies. It also explains why drug manufacturers were slow to invest in research necessary to come up with new vaccines.
But in the 90s, the rules changed. Pharma companies were allowed to patent the processes they used to manufacture vaccines and other products from nature. As a result, the number of applications for patents on vaccines soared tenfold to 10,000+. Not surprisingly, vaccine prices also took off. In 2013, Pfizer raked in nearly $4 billion on sales of the Prevnar 13 vaccine, which prevents diseases caused by pneumoccal bacteria, from ear infections to pneumonia — for which Pfizer was the only manufacturer.
Many lifesaving drugs continue to be made by only 1 company long after the original patent expires. In part, that’s because the Patent Office often renews patents on the basis of small and insignificant changes to the original drugs that technically make them new and therefore patentable. The office is not required to weigh the financial burdens its decisions impose on consumers. And pharmacies cannot substitute generic versions of a brand-name drug when it’s changed in even the most minor of ways. For example, Forest Labs announced in 2014 it would stop selling the existing tablet form of Namenda, its widely used Alzheimer’s drug, in favor of new, extended-release capsules called Namenda XR. The capsules were simply a reformatted version of the tablet, but even that minor change prevented pharmacies from substituting generic versions of the tablet, whose patent was about to run out. ‘Product hopping’ like this keep profits flowing to the pharma companies but costs consumers and health insurers a bundle.
Many drugs that are available over the counter in other countries can be bought only by prescription in the US, and the drug companies aggressively market these brands long after the patents have expired so that patients ask doctors to prescribe them.”
“Drugs are priced so high that an estimated 50 million Americans — more than 1/4 of them with chronic health conditions — didn’t fill their prescriptions in 2012.
The law allows pharma companies to pay doctors for prescribing their drugs. Over a 5-month period in 2013, doctors received some $380 million in speaking and consulting fees from drug companies and device makers. Some doctors pocketed over half a million dollars each, and others received millions in royalties from products they had a hand in developing. Doctors claim these payments have no effect on what they prescribe. But why would pharma companies shell out all this money if it didn’t provide them a healthy return on their investment?
Drug companies pay the makers of generic drugs to delay their cheaper versions. These so-called pay-for-delay agreements, perfectly legal, generate huge profits both for the original manufacturers and for the generics — profits that come from consumers, from health insurers, and from government agencies paying higher prices than would otherwise be the case. The tactic costs American an estimated $3.5 billion a year. Europe doesn’t allow these sorts of payoffs. The major American drugmakers and generics have fought off any attempts to stop them.”
“We have the power to change all this, re-creating an economy that works for the many rather than the few. Contrary to Karl Marx, there’s nothing about capitalism that leads inexorably to mounting economic insecurity and widening inequality. The basic rules of capitalism aren’t written in stone. They’re written and implemented by human beings.”
Copyrights
“When the nation was founded, copyrights covered only ‘maps, charts, and books’ and gave the author the exclusive right to publish for 14 years, which could be renewed once, for a max term of 28 years. In 1831, the max was increased to 42 years. In 1909, Congress again extended the max, this time to 56 years, where it remained for the next half century. Then, beginning in 1962, Congress extended it to be the life of the author plus an additional 50 years. The creator didn’t even have to seek renewal. If the creation emerged from a corporation, the copyright lasted 75 years. (This change operated retroactively, so any work still under corporate copyright in 1978, when the new law took effect, was eligible for an additional 19 years of protection.)
In 1998, Congress added 20 years on top of all this — to 95 years from the first publication, in the case of corporate owners. The Copyright Term Extension Act of 1998 was also known around DC as the Mickey Mouse Protection Act because it was basically about Mickey. Walt Disney had created Mickey in 1928, so under the prevailing 75-year corporate limit Mickey would move into the public domain in 2003. Pluto, Goofy, and the rest would become public shortly thereafter. That would mean big revenue losses for Disney. Accordingly, Disney lobbied Congress intensively to extend copyright protection for another 20 years, as did Time Warner, which held copyrights on many 20th-century films and musical scores, along with the heirs of dead songwriters George and Ira Gershwin. They got what they wanted. Most of those old copyrights are now scheduled to expire in 2023. It seems a safe bet that before that year, copyrights will be extended yet again. Moreover, copyrights now cover almost all creative works, including computer programs, and give owners (now, usually large corporations) rights over all derivative work that might be generated by the original.
As a result, much of the creative output of the last century — including icons like Superman, a treasure trove of movies; the last century’s great outpouring of music; and masterpieces of lit — have been locked away for an additional 2 decades. Here again, the result is higher corporate profits, higher costs to consumers, and less access for everyone. The reason more printed books are available on Amazon from the 1880s than from the 1980s, for example, is that anyone is free to republish books from the earlier era.
This reorganization of the market won’t spur more creativity from Disney or the brothers Gershwin, since they’re no longer with us. It’s doubtful that the reorg will even give added incentives to writers and artists now alive, who will have to be dead for 70 years rather than 50, before their works move into the public domain. Ironically, many of Disney’s original creations drew heavily on characters and stories that had become classics, such as Aladdin, the Little Mermaid, and Snow White, because they’d long been in the public domain. But now the public domain is much smaller.
Meanwhile, the large corporate owners of copyrights aggressively fight in court to extend their ownership to anything that might be considered derivative of their long-extended copyrights, adding to their bottom lines and their economic clout but presenting insurmountable barriers for individual creators, including programmers, who might have an idea that turns out to be too close to one already owned. As a result, big players continue to win while the rest of us lose, because they can pour so much money into these market-defining decisions.”
“This is one major reason the rate at which new businesses have formed in the US has slowed markedly in recent years. Between 1978 and 2001, as the new giants gained control, that rate was halved. The decline transcends the business cycle; neither the late 90s or early 00s expansions, nor the ’01 or ‘08-’09 recessions seem to have had any effect on the downward trend. And that trend has been immune to which party has occupied the White House or controlled Congress.”
“100% of the inhabitants of Stockholm have high-speed service in their homes that costs no more than $28/month. Stockholm built fiber lines and leased them out to private operators. That resulted in intense competition among operators, low prices, and universal coverage. The project quickly recouped its costs and by 2014 was bringing millions of dollars of revenue to the city.
What’s stopping US cities from doing the same? Cable operators with deep pockets and lots of political influence. They exemplify the new monopolists. They pay millions of dollars a year to cities in video franchise fees in order to retain their monopoly, and millions more to lobbyists and lawyers to ensure cities don’t stray. They’ve successfully pushed 20 states to enact laws prohibiting cities from laying fiber cables. In 2011, John Malone, chairman of Liberty Global, the largest cable company in the world, admitted that when it comes to high-capacity data connections in the US, ‘Cable’s pretty much a monopoly now.’ Indeed, by 2014 more than 80% of Americans had no choice but to rely on single cable company for high-capacity wired data connections to the internet. Since none of the cable companies face real competition, they have no incentive to invest in fiber networks or even to pass along to consumers the lower prices their large scale makes possible.
1 city that has bucked the trend is Chattanooga, which built its own fiber-optic network. In less than a minute, the lucky inhabitants of Chattanooga can download a 2-hour movie that takes nearly a half hour to download with a typical high-speed broadband connection. But the cable operators are fighting back. By 2014, Comcast had twice sued the city-owned utility and was spending millions on a PR campaign aimed at discrediting the publicly-run service.”
“Monsanto, the giant biotech corporation, owns the key genetic traits in more than 90% of the soybeans planted by farmers in the US and 80% of the corn. Its monopoly grew out of a carefully crafted strategy. It patented its own genetically modified seeds, along with a herbicide that would kill weeds but not soy and corn grown from its seeds. The herbicide and herbicide-resistant seeds initially saved farmers time and money. But the purchase came with a catch that would haunt them in the future: The soy and corn that grow from those seeds don’t produce seeds of their own. So every planting season, farmers have to buy new seeds. In addition, if the farmers have any seeds left over, they must agree not to save and replant them in the future. In other words, once hooked, farmers have little choice but to become permanent purchasers. To ensure its dominance, Monsanto has prohibited seed dealers from stocking its competitors’ seeds and has bought up most of the small remaining seed companies.
Not surprisingly, in less than 15 years, most of America’s commodity crop farmers have become dependent on Monsanto. The result has been higher prices far beyond the cost-of-living rise. Since 2001, Monsanto, has more than doubled the price of corn and soybean seeds. The average cost of planting acre of soybeans increased 325% between 1994 and 201, and the price of corn seed rose 259%. Another result has been a radical decline in the genetic diversity of the seeds we depend on. This increases the risk that disease or climate change might wipe out entire crops for years, if not forever.”
“While in 2001, the top 10 sites accounted for 31% of all page views in America, by 2010, the top 10 accounted for 75%. Talk about power.”
“In France, for example, no seller can offer more than 5% off the cover price of new books, with the result that books cost about the same wherever you buy them, even online. The French government classifies books as an ‘essential good,’ along with electricity, bread, and water.”
Morals and the Market
“You can sell your blood in the US, as well as in Mexico, Thailand, Ukraine, and India. But you can’t in Canada and Britain. You can rent out your womb for money in most American states (in 204, the going rate for gestational surgery was $20k-$30k), but not in most of Europe.
In 1999, Sweden decided that selling sex was no longer illegal and stopped treating prostitutes as criminals. But the country made it illegal to pay for sex. Swedish police found that the number of women trafficked into Sweden thereafter dropped sharply, as compared with the many thousands trafficked into neighboring Denmark, where paying for sex remained legal.”
Wall Street
“The court made official what had been the unofficial law on Wall Street: it’s all about who you know. If, for example, the CEO of a company gives his golfing buddy a confidential tip about what the company is about to do, and the buddy tells a hedge-fund manager who then makes a fortune off that confidential info, the winnings are perfectly legal.
Because confidential info is the ‘coin of the realm’ on Wall St, it’s likely that a significant portion of what’s earned on the Street is based on info unavailable to average investors. Insiders fix the market for their own benefit. What’s the chance that Congress will change the law to rein in insider trading? Almost zero as long as the Street continues to provide a significant share of the campaign contributions that members of Congress and the president rely on to get elected. In Europe, by contrast, trading on confidential info is illegal. If a trader knows or has reason to know that specific info isn’t yet public, he may not use it.”
Bankruptcy
“Over the last few decades, every major US airline has been through bankruptcy at least once, usually in order to renege on previously agreed-upon labor union contracts. Under the bankruptcy code (again, largely crafted by credit card companies and bankers), labor contracts stipulating workers’ pay have a relatively low priority when it comes to who gets paid off first. That means even the threat of bankruptcy can be a potent weapon for getting union members to sacrifice wages already agreed to. In 2003, American CEO Don Carty used such a threat to wring almost $2 billion of concessions from American’s major unions. Carty preached the necessity of ‘shared sacrifice’ but failed to disclose that he had secretly established a supplemental exec retirement plan whose assets, locked away in a trust, couldn’t be touched in the event of a bankruptcy. When Carty resigned he walked off with close to $12 million, courtesy of the secret plan.
Despite employee concessions, American slipped into bankruptcy in 2011. The corporation then promptly rejected what remained of its former labor agreements and froze its employee pension plan. On emerging from bankruptcy in 2013, American’s creditors were fully repaid, with interest. Even the company’s shareholders came out of bankruptcy richer than they went in. (American’s stock rose even further after its merger with US Airways later that year.) To top it off, Tom Horton, the CEO who had ushered the firm through bankruptcy, received a severance award valued at more than $19.9 million. Everyone came out ahead — except for American’s employees, who, even though they retained their jobs, had lost much of their pay and benefits. So much for ‘shared sacrifice.’”
“The real burden of Wall St’s near meltdown fell on small investors and homebuyers. As home prices plummeted, many homeowners found themselves owing more on their mortgages than their homes were worth and unable to refinance. Yet Chapter 13 of the Bankruptcy Code (whose drafting was largely the work of the financial industry) prevents homeowners from declaring bankruptcy on mortgage loans for their primary residence. When the financial crisis hit, some members of Congress, led by Sen. Dick Durbin, tried to amend the code to allow distressed homeowners to use bankruptcy. That would give them a powerful bargaining chip for preventing the banks and others from servicing their loans for foreclosing on their homes. If the creditors didn’t agree, their cases would go on to a bankruptcy judge, who presumably would reduce the amount to be repaid rather than automatically force people out of their homes.
The bill passed the House, but when in late April 2009 Durbin offered his amendment in the Senate, the financial industry flexed its muscles to prevent its passage, arguing that it would greatly increase the cost of home loans. (No convincing evidence showed this to be the case.) The bill garnered only 45 Senate votes, even though Democrats were in the majority. Partly as a result, distressed homeowners had no bargaining power. More than 5 million of them lost their homes, and by 2014 another 2 million were near foreclosure. So much, again, for shared sacrifice.”
“The bankruptcy code doesn’t allow student loan debts to be worked out under its protection. If debtors cannot meet their payments, therefore, lenders can garnish their paychecks. (If people are still behind on their student loan payments when they retire, lenders can even garnish their Social Security checks.) The only way grads can reduce their student debt burden, according to a 1998 law enacted at the behest of the student loan industry, is to prove in a separate lawsuit that repayment would impose an ‘undue hardship’ on them and their dependents. This is a stricter standard than bankruptcy courts apply to gamblers seeking to reduce their gambling debts.”
Regulation
“Long before Japan’s Fukushima Daiichi plant contaminated a large swath of the Pacific Ocean with radioactive material in 2011, for example, GE marketed the Mark 1 boiling water reactor used the in the plant (as well as in 16 American nuclear plants), a cheaper alternative to competing reactors because it used a smaller and less expensive contaminant structure. Yet the dangers associated with the Mark 1 reactor were well known. In the mid-80s, Harold Den, an official with the Nuclear Regulatory Commission, warned that Mark 1 reactors had a 90% probability of bursting if their fuel rods overheated and melted in an accident. A follow-up report from a study group convened by the commission found that ‘Mark 1 failure within the first few hours following core melt would appear rather likely.’
Why hasn’t the commission required GE to improve the safety of its Mark 1 reactors? One factor may be GE’s formidable political and legal clout. In the 2012 election, for example, its execs and PACs contributed almost $4 million to campaigns (putting it 63rd out of 21,000 companies), and it spent almost $19 million lobbying (the 5th-highest lobbying tab of 4,000 companies). Moreover, 104 of its 144 lobbyists had previously held government posts.
Similarly, the national commission appointed to investigate the giant oil spill in the Gulf of Mexico in 2010 found that BP failed to adequately supervise Halliburton’s installation of the deep-water oil well — even though BP knew Halliburton lacked experience in testing cement to prevent blowouts and hadn’t performed adequately before on a similar job. In short, neither company had bothered to spend enough to ensure adequate testing of the cement. Meanwhile, the Minerals Management Service of the Department of the Interior hadn’t adequately overseen the oil and oil-service companies under its watch because it had developed cozy relationships with them.”
“When an industry doesn’t want a law enacted but fears a public backlash if it openly opposes a proposed law, it quietly makes sure that there aren’t enough funds to enforce it. This was the case when the food industry went along with the Food Safety Modernization Act, which became law in 2011, after thousands of people were sickened by tainted food. Subsequently, the industry successfully lobbied Congress to appropriate so little to enforce it that it has been barely implemented.
Defanging laws by hollowing out the agencies charged with implementing them works because the public doesn’t know it’s happening. The enactment of a law attracts attention. But the defunding of the agencies supposed to put the law into effect draws no attention, even though it’s the practical equivalent of repealing it.”
The Judicial System
“32 states hold elections for judges of state supreme courts, appellate courts, and trial courts. Nationwide, 87% of all state court judges face elections. This is in sharp contrast to other nations, where judges are typically appointed with the advice and consent of legislative bodies. As Sandra Day O’Conner said, ‘No other nation in the world does that, because they realize you’re not going to get fair and impartial judges that way.’
Until the 80s, judicial elections were relatively low-profile affairs. But beginning in the early 90s, campaigns became far more costly and contentious. After Citizens United opened the floodgates to corporate campaign donations, spending on judicial elections by outside groups skyrocketed. In the 2012 election, independent spending was $24 million, compared with about $3 million spent in the ‘01-’02 election cycle, a ninefold increase. A 2013 study showed that the more donations justices receive from businesses, the more likely they are to rule in favor of business litigants. Another found corporate spending on judicial elections paying off for corporations. ‘In the span of a few short year, big business succeeded in transforming courts such as the TX and OH Supreme Courts into forums where individuals face steep hurdles to holding corporations accountable,’ the author wrote, showing, for example, that the insurance industry in OH donated money to judges who then voted to overturn recent decisions in the industry disliked, and energy companies in TX funded the campaigns of judges who then interpreted laws to favor them.
State attorneys general, in charge of enforcing the rules by bringing lawsuits, are also subject to election and re-election, and they, too, are receiving increasing amounts of corporate money for their campaigns. A Times investigation in 2014 found that major law firms were funneling corporate campaign contributions to attorneys general in order to gain their cooperation in dropping investigations of their corporate clients, negotiating settlements favorable to their clients, and pressuring federal regulators not to sue. The UT attorney general, for example, dismissed a case pending against BoA, over the objections of his staff, after recently meeting with a BoA lobbyist who also happened to be a former attorney general. Pfizer donated hundreds of thousands of dollars to state attorneys general between 2009–2014, to encourage favorable settlements of a case brought against the company by at least 20 states for allegedly marketing its drugs for unapproved uses. AT&T was a major contributor to state attorneys general who opted to go easy on the corporation after a multistate investigation into the firm’s billing practices.”
Education
“One study found that good teachers increase the average present value of their students’ lifetime income by $250,000 per classroom.”
“Just before the financial crisis, almost half of Harvard’s graduating class took jobs on Wall St. That portion dropped during the crisis but began rising again after 2009. According to research, around 70% of Harvard’s senior class routinely submit resumes to Wall St and corporate consulting firms. The percentages are similar at other Ivy Leagues. At Princeton, 36% of 2010 grads went into finance, down from the pre-financial crisis high of 46% in 2006. Add in corporate management consulting, and it was more than 60%.
The hefty endowments of such elite institutions are swollen with the tax-subsidized donations of wealthy alumni, many of whom seek to increase the odds that their own kids will be admitted so they too can become enormously wealth financiers, management consultants, and corporate execs.”
“A large portion of the money to support public schools comes from local property taxes. The federal government provides only about 10% of all funding, and the states provide 45%, on average. The rest is raised locally. Most states do try to give more money to poor districts, but most also cut way back on their spending during the recession and haven’t nearly made up for the cutbacks. Meanwhile, real estate markets in lower-income communities remain weak, so local tax revenues are down. As we segregate by income into different communities, schools in lower-income areas have fewer resources than ever. The result is widening disparities in funding per pupil, to the direct disadvantage of poor kids.
The wealthiest, highest-spending districts are now providing about twice as much funding per student as are the lowest-spending ones. In some states, such as CA, the ratio is greater than 3:1. What are called ‘public schools’ in many of America’s wealthy communities aren’t really public at all. In effect, they’re private schools, whose tuition is hidden away in the purchase price of upscale homes there, and in the corresponding property taxes.”
“The US is one of only 3 out of 34 advanced nations whose schools serving higher-income children have more funding per pupil and lower student-teacher ratios than do schools serving poor students (the two others are Turkey and Israel). Other advanced nations do it differently. Their national governments provide 54% of funding, on average, and local taxes account for less than half the portion they do in America. And they target a disproportionate share of national funding to poorer communities.
Corporate Law
“Corporate law in the US gives shareholders at most an advisory role on CEO pay. ‘Say on pay’ votes are required under Dodd-Frank, but the votes aren’t binding on a corporation. Billionaire Larry Ellison, CEO of Oracle, received a pay package in 2013 valued at $78.4 million, a sum so stunning that Oracle shareholders rejected it. That made no difference, because Ellison controlled the board. In Australia, by contrast, shareholders have the right to force an entire corporate board to stand for re-election if 25% or more of a company’s shareholders vote against a CEO pay plan 2 years in a row. That rule has contributed to the far more modest pay raises Australian CEOs have been granted in recent years relative to their American counterparts, in 2013 averaging only 70x the pay of the typical American worker.
“Professor William Lazonick has documented that a major means by which corporations accomplish such pumping is to use their earnings, or to borrow additional money, to buy back shares of stock. This maneuver pumps up share prices by reducing the number of shares owned by the public. A smaller supply effortlessly increases the price of each remaining share. In recent years, such buybacks have become a major corporate expenditure. Between 2001–2013, they accounted for a whopping $3.6 trillion in outlays of companies in the Standard & Poor’s 500 index.”
“Not only do stock buybacks enrich CEOs and other top execs at the expense of smaller investors who don’t know about the timing or amounts of buybacks, they also drain away money the corporation might otherwise spend on R&D, long-term expansion, worker retraining, and higher wages. Every dollar CEOs ‘realize’ from their sale of shares whose price has been pumped up by buybacks requires that many more corporate dollars be dedicated to making the repurchases. The perverse effect on corporate priorities is unmistakable. In the first 3 decades after WWII, major American corporations typically retained and reinvested their earnings. But beginning in the 80s, a steadily increasing portion of corporate earnings went to share buybacks.”
“U of Cambridge professors studied 1,500 large companies and how they performed in 3-year periods, from 1994–2011. They then compared these companies’ performance to other companies in their same fields. They found that the 150 companies with the highest-paid CEOs returned about 10% less to their shareholders than did their industry peers. In fact, the more these CEOs were paid, the worse their companies did. Companies that were the most generous to their CEOs — and whose high-paid CEOs received more of that compensation as stock options — did 15% worse than their peer companies, on average. ‘The returns are almost 3x lower for the high-paying firms than the low-paying firms,’ said Cooper. ‘This wasteful spending destroys shareholder value.’ Even worse, the researchers found that the longer a highly paid CEO was in office, the more the firm underperformed.”
“Corporations deduct CEO pay from their income taxes, requiring the rest of us to pay more proportionately in taxes to make up the difference. Howard Schultz, CEO of Starbucks, received $1.5 million in salary for 2013, along with a whopping $150 million in stock options and awards. That saved Starbucks $82 million in taxes. The 1993 provision allowing corporations to deduct from their tax bills exec compensation in excess of $1 million if tied to company ‘performance’ soon became a sham.”
Wages
“Between 2000 and 2013, the real average hourly wages of young college grads declined. By 2014, according to the NY Federal Reserve Bank, the share of recent college grads working in jobs that typically don’t require a college degree was 46%, vs. 35% for college grads overall. The Times called this group ‘Generation Limbo’ — highly educated young adults ‘whose careers are stuck in neutral, coping with dead-end jobs and listless prospects.’”
“More money in the pockets of low-wage workers means more sales in the places where they live, which in turn creates faster growth and more jobs. Researchers examined employment in several hundred pairs of adjacent counties lying on opposite sides of state borders, each with different minimum wages (one at the federal minimum, the other at a higher minimum enacted by the state) and found no statistically significant increase in unemployment in the higher-minimum wage counties, even after 4 years. They also found that employee turnover was lower where the minimum wage was higher, presumably saving employers money on recruiting and training new workers.”
“Although it’s called a ‘charitable deduction,’ very little of this public subsidy ends up with the poor. A 2005 analysis showed that even under the most generous assumptions only about 1/3 of ‘charitable’ giving is targeted toward helping poor people. A large portion is allocated to operas, art museums, symphonies, and theaters — all worthy enterprises but not ‘charities’ as we normally use the term.”
“Private university endowments in 2014 totaled around $550 billion, centered in a handful of prestigious institutions. Harvard’s is more than $32 billion, followed by Yale at $21 billion, Stanford at $19 billion, and Princeton at $18 billion. (In 2013 Harvard launched a capital campaign for another $7 billion.) Because of the charitable tax deduction, the amount of government subsidy to these institutions in the form of tax deductions is about 1 of every 3 dollars contributed. A few years ago, Meg Whitman contributed $30 million to Princeton. In return she received a tax break estimated to be around $10 million. In effect, Princeton received $20 million from Whitman and $10 million from the US Treasury — that is, from you and me and other taxpayers who made up the difference. Add in these endowments’ exemptions from taxes on capital gains and on income they earn, and the total government expenditure is even larger. Divide by the relatively small number of students attending these institutions, and the amount of subsidy per student is huge. The annual government subsidy to Princeton, for example, is about $54k per student. Other elite private universities aren’t far behind.”
“State and local financing for public higher ed came to about $76 billion in 2013, nearly 10% less than a decade before. Since more students attend public universities now than 10 years ago, that decline represents a 30% drop per student. That means the average annual government subsidy per public university student comes to less than $6,000, about 1/10 the per-student subsidy at Princeton.”
Political Spending
“Research showed that elected leaders paid attention to local elites — small businesses that constituted the local chamber of commerce, for example — and to national orgs whose members were active within local and state chapters, such as the American Legion, the Farm Bureau, and local affiliates of national labor unions. Political parties were likewise layered from the bottom up, based on strong local and state orgs. Communication flows flowed mainly upward. The American Legion, for example, whose divisions existed in every state, with chapters in every major city, was largely responsible for passage of the GI Bill of 1944, which guaranteed every returning veteran up to 4 years of postsecondary education, subsidized mortgages, and business loans. The Legion was successful precisely because its divisions and chapters mobilized tens of thousands of members to pressure their own senators and reps.”
“When political scientists surveyed Chicagoans with an average net worth of $14 million, they found that their biggest concerns were either the budget deficit or excessive government spending, ranking these as priorities 3x as often as they did unemployment. And — no surprise — these wealthy individuals were also far less willing than other Americans to curb deficits by raising taxes on high-income people and more willing to cut Social Security and Medicare. They also opposed initiatives to meet other Americans favored, such as increasing spending on schools and raising the minimum wage.
The other thing distinguishing the wealthy respondents from the rest of America was their political influence. In the previous year, ⅔ of them had contributed money (averaging $4,600) to political campaigns or orgs. A fifth of them had even bundled contributions from others. That money bought the kind of political access most Americans only dream of. About half of these wealthy people had recently initiated contact with a US senator or rep, and 44% of those contacts concerned matters of relatively narrow economic self-interest rather than broader national concerns.”
“McChutcheon eliminated the $123,200 cap on the amount an individual can contribute to federal candidates and political parties, allowed a presidential candidate to solicit as much as $1.2 million per donor in a 2-year election cycle, and permitted a House leader to raise as much as $2.3 million per donor in a 2-year election cycle.”
“In the 2014 midterms, more than half the advertising aired by outside groups came from orgs that disclosed little or nothing about their donors. Some of these orgs were established specifically to shield the identities of the wealthy individuals and corporations that contributed to them. These groups financed more political ads than did super PACs.”
A Vision For the Future
“The minimum wage would be raised to half the median wage and thereafter adjusted for inflation. Workers in low-wage industries such as retail, fast food, hotels, and hospitals would be able to form a union by a majority up-or-down vote, thereby giving them more bargaining leverage in contract negotations over their wages and benefits. A more evenhanded approach to international trade agreements would seek to protect not only American corporations’ intellectual property and the financial assets of American banks but also the jobs of American workers that might be imperiled. For example, the US would require that all trading partners to such agreements establish minimum wages in order that the gains from trade be widely shared in those countries, thereby generating new customers for American exports and arguably more political stability overall. Meanwhile, a portion of the gains from trade at home would finance a world-class re-employment system including wage insurance, so that job losers who took new jobs paying less than their former jobs would receive 90% of the difference for 2 years and income support of 90% of their former wages if they seek to upgrade or change skills in full-time educational programs.”
“For the last 30 years, almost all incentives operating on the corporation have resulted in lower pay for average workers and higher pay for CEOs and other top execs. The question is how those incentives can be reversed.
One possibility would be to make corporate tax rates depend on the ratio of CEO pay to the pay of the median worker in the firm. Corporations with low ratios would pay a lower corporate tax rate, and vice versa. A bill introduced in the CA legislature in 2014 offers an example. Under it, if a CEO earns 100x as much as the median worker in the company, the company’s tax rate drops from the 9% corporate tax rate now applied to all firms in CA to 8%. If the CEO makes 25x the pay of the typical worker, the tax rate drops to 7%. On the other hand, if the CEO earns 200x that of the typical employee, the tax rate rises to 9.5%; 400x, to 13%.”
“A variation on this idea would lower taxes on employers who give their workers wage increases commensurate with the nation’s annual productivity growth, while raising taxes on employers who don’t. This proposal would go some way to reconnecting worker income to the nation’s overall economic gains. One objection might be that companies can game the system by subcontracting low-paying jobs to another company. Both proposals control for this. Under the CA proposal, corporations that begin subcontracting more of their low-paying jobs would have to pay a higher tax; under the Galston proposal, employers would be barred from misclassifying employees as independent contractors or outsourcing low-wage work that previously had been done inside the corporation.
Another proposed change would give workers more direct ownership of the corporation by providing additional tax incentives for employee stock ownership and profit sharing, or the formation of employee-owned coops.”
“In Germany, corporate laws require ‘co-determination,’ with a management board overseeing day-to-day ops and a supervisory board for more high-level decisions. Depending on the size of the company, up to half of the members of the supervisory board represent employees rather than shareholders. Workers on the shop floor are also represented by works councils. This structure has made major Germany corps, such as VW, far more receptive to worker rights than their US counterparts (as was dramatically illustrated in 2014 when VW workers sought to form a union at their TN factory; while VW didn’t object, state and local politicians worried aloud that unionization would harm the state’s economy). It has also limited CEO pay, preserved many high-skill jobs, and resulted in a higher median wage and a far more secure and prosperous working class than in the US.
With effective countervailing power, the American corporation could be reimagined and reinvented. Laws would require not only that employees be represented but that they receive voting rights proportional to their stakes and would prevent any single person or stakeholder from keeping most voting rights for themself. The legal privileges of incorporation in America — limited liability, life in perpetuity, corporate personhood for the purpose of making contracts and the enjoyment of constitutional rights — would be available only to entities that share the gains from growth with their workers while also taking the interests of their communities and the environment into account.”
“I would never have expected that the life expectancy of an American white woman without a high school degree would decrease by 5 years between 1990 and 2008.
I also failed to anticipate how quickly the combo of digital tech with huge network effects would push the ratio of employees to customers to extraordinary lows. When Insta was sold to FB for about $1 billion in 2012, it had 13 employees and 30 million customers. Contrast this with Kodak, which had filed for bankruptcy a few months before. In its prime, Kodak had employed 145k people.
The ratio continues to drop. When FB purchased WhatsApp for $19 billion in 2014, WhatsApp had 55 employees serving 450 million customers.”
“An alternative would be to provide every citizen a tiny share of all intellectual property awarded by the patent office and protected by the government. As the worth of the nation’s stock of intellectual capital grew, all citizens would reap the dividends. Another alternative would be to give every child at birth a basic minimum endowment of stocks and bonds — a ‘share’ in the future economy, which, as the economy grew and the value of the endowment compounded, would become a nest egg capable of producing a minimum basic income.
However it’s accomplished, the ratio must be adapted toward creating a more inclusive economy. Absent some means for sharing the increasingly large rewards that will otherwise go to a few people and their heirs fortunate enough to possess ownership rights to these robots and related tech, the middle class will disappear, and capitalism a we know it will not survive.”
