Two of the greatest scandals of today’s America are Gun Violence and The Lie that the 2020 Presidential Election was Stolen (and that so many people believe that). But ranking right up there has to be Our Inequitable Income Distribution. That the Democratic political party has acquiesced in this massive injustice makes it all the worse and even sinister.
For example, in 2018 America’s richest 20% of households brought in 52% of the nation’s income that year, which leaves 48% of income to the bottom 80% of Americans. This inequality has been increasing. In 1968, the top 5% of earners captured 16% of the nation’s income. In 2020, their portion rose to 23%. Each percentage point of difference represents a shift of around a hundred (or two) billion dollars! Let us recall from the previous post, that a billion is 1,000,000 millions; that’s a lot of millions!
Economically, how did we get to where we are? And what is its significance, anyway? Prof. Robert Reich of U. Cal. Berkley illustrates convincingly that far, far, too much of our nation’s and world’s wealth is concentrated in the hands and pockets of far too few. Political power then follows that money. Reich is one of our leading authorities on “Political Economy,” the old term for economics. That term is pertinent here because there is a circular relation between wealth and political power. It is Reich’s belief that this is true to the extent that currently Big Money (the super rich and giant corporations) control American politics. We have lost our democracy! contends the former Secretary of Labor in the Bill Clinton administration.
In the late 1800s and into the early 1900s, the first “Robber Barons” ruled our land. This is the accepted historical narrative to describe these times, but also often described as “The Gilded Age,” a period of great wealth accumulation and extravagant consumption. In America, giant railroads were pushing their way across the west. Andrew Carnegie made millions supplying the steel for rails and locomotives. The oil industry was growing and then monopolized by Standard Oil. Children worked six days a week in coal mines and factories . Many cities were growing to an enormous new size.
The Progressive Era
The age of the the first Robber Barons came to an end (of sorts) with an era of reform. A rising middle class, a growing prominence for universities and their professors, the competition and growth of newspapers and magazines, all helped motivate changes. Journalists, government (especially local—like Governor “Fighting” Bob Lafollette of Wisconsin), and a growing labor movement including a rise in popularity of Socialism, asserted themselves as countervailing power to big businesses and businessmen. Some giant corporations were broken up by the first anti-trust suits. Working conditions began to be modified by labor laws. The Federal Reserve Act of 1913 attempted to increase the stability and coordination of the banking system.
This is where Robert Reich takes up his case in his 2020 book, The System. By the 1950s, a system of “countervailing powers” had become established. Major labor unions existed in many industrial sectors in the U.S. Banking regulations and the Federal Reserve system were fairly effective. Markets and manufacturing were still largely national and not international. A certain balance of power to existed and this was reflected in how major corporations were run and how wealth was distributed.
This balance of power was reflected in A CEO’s pay. A Chief Executive Officer of a major firm in the 1950s earned about twenty times their average employee. Today, things have changed to 300 times, notes Reich. Corporations were run in a way that Reich calls “Stakeholder Capitalism.” An executive of a major corporation was considered to be “a statesman;” he maintained an accord among the vital components of his business: stockholders/owners, organized workers, customers, and the community in which the business operated. These were all the “stakeholders” in a corporation, and all needed consideration. In these days, a CEO had often worked his way up through the ranks of a company and had lived in that community for decades.
The chairman of Standard Oil stated in an address in 1951, that the job of management was “to maintain an equitable and working balance among the claims of the variously directly affected interest groups.” The Business Roundtable, the most exclusive organization of leading American business executives in the 1950s and today, stated as late as 1981 that, shareholders should receive “a good return,” but “the legitimate concerns of other constituencies must have appropriate attention.”
The Corporate Raiders: Accord Among the Stakeholders Ends
In the 1980s, American Capitalism began to change, reports Reich. Men like Ivan Boesky, Michael Milken and Carl Icahn— “corporate raiders”—realized large sums of money were to be made, not by the invention of a new product or improvement in the most direct methods of production, but by manipulating the economic resources already available. They would squeeze from them additional “wealth.” Companies who had a stock value that was lower than the value of their other assets were susceptible to takeover. The raiders would sell off parts of these firms, move their production facilities to low wage areas, and bust unions. Robert Reich contends this was the shift from “stakeholder” to “shareholder capitalism.” By the late 90s, The Business Roundtable now declared that “the job of business is in fact only to maximize shareholder wealth,” reports Reich. The former stakeholders of the community and workers are now abandoned to the goal of rising stock value.
13 hostile takeovers of companies worth over $1 billion occurred in all the 1970s, reports Reich, but in the 1980s there were 150. In the 80s, over 2,000 “leveraged buyouts” of large companies occurred. A leveraged buyout is when money is borrowed by the raiders, usually through the sale of a special bond, to buy a majority control of stock in the target company. These bonds became known as “junk bonds” due to their highly speculative and risky nature, and huge amounts of money were made on just the origination and trading in these bonds themselves (another example of abstract wealth.). A “hostile takeover” is one where the raiders meet opposition to their takeover by the corporation’s management and some of its traditional owners.
As the 80s continued, the management and shareholders of most large firms realized the times had changed and now stock value, shareholder wealth, meant all. The famous (or infamous) CEO of GE (General Electric), Jack Welch, recognized the trend early and by the time he retired in 2001 the stock value of GE had risen from $13 billion to $500 billion. In the early 80s, Welch laid off nearly one quarter of GE’s workers, totaling about 100,000 layoffs. By the end of that decade, the number of Americans working for GE was cut in half again (a decline of 160,000) and the number of foreign workers doubled to 130,000. General Electric has a history in electricity that goes back to Thomas Edison. Much of that history took place in the upstate New York city of Schenectady where in 1896 Edison moved his young company; today, according to Reich, GE has virtually abandoned that city.
In the early 80’s, corporate raiding became a major news story. Many conservative-leaning economists applauded the trend, believing takeovers “…improve efficiency, transfer scarce resources to higher valued uses and stimulate effective corporate management,” said President Reagan’s chief economic advisor at that time. Leading conservative economist, Milton Friedman, had long questioned the management philosophy of respect for all “stakeholders,” but Reich argues that the leading advocate for “shareholder value” was at The Harvard Business School, Michael Jensen. Before crowded seminars, he contended that targeted firms were inefficient, with economic resources “locked up” within them that deserved to be “extracted.”
The Transfer of Wealth
Today, the frenzy of corporate takeovers has cooled, and Prof. Reich sites several reasons. Maximizing shareholder wealth has become the standard philosophy for all large firms, leaving them far less susceptible to takeover. The fate of Unions in our country is a fact that substantiates the contention that the distribution battle has been lost. In 1955, about 30% of all private sector workers were union members; in 2020 that percentage is down to 6.5%!
But “underperforming” firms still exist, and are still being bought and sold, dismembered and manipulated, by “private equity managers” and “private equity firms,” the new and more respectable-sounding name for the old term, “corporate raider,” notes Reich.
Warren Buffet and his Berkshire Hathaway are a prototype for this kind of firm, and probably the most well-known. Buffet calls himself a “value investor” and thus invests in not only underperforming firms but also small firms with growth potential, among other opportunities. Buffet has obtained his funds to expand his assets, not by the use of bonds, but by the acquisition of insurance companies, GIECO for example. Technically, and by law, the money an insurance company receives in premiums is not its own, but it is theirs to invest. (An insurance company has an obligation to meet its payout demands at any point, much like a bank. Insurance is another abstract form of economic product, and Buffet is another example of making money off of money, especially other people’s money.) Berkshire Hathaway can also be considered a “holding company,” and its assets are worth over $600 billion. In 1980, the value of a share of its stock was $275; in 2014 it was worth $186,000 which is an increase of almost 700,000%! Today a share is worth over $500,000 each!!!
Here at The Nature Religion Connection, we have often struggled with the problem of Abstract Ways of Thinking. All our experience, and thoughts about it, are to some extent abstract. It is often hard to separate the abstract from the more concrete, or which of the two is more real or important. The economic discussion above has that feature. Abstractions such as The Corporation, Stock, Bonds, Insurance, and even the homely $1 bill are significantly Symbolic and more abstract entities than The House that gives you shelter or The Soup in the pot that you will have for dinner. Among the NOT so abstract are the workers in your company. Yet, in conservative economic theory and in aggressive business practice, Real People become simply “economic resources,” an abstraction to be manipulated and moved about like trucks, buildings and machines!
Abstractions have been a great boon to economics and today seem to often constitute the bulk of it. Also, economic abstractions are currently the greatest problem. The current problem of Income Distribution would not even exist in its current form without a massive apparatus of banking and markets, “investment” and “saving,” record-keeping, reporting, and calculation. Certainly the serfs of Middle Age Europe had a sense of how little they had and how much the Lord of the Manor had. But, in today’s terms of Billions of Dollars, it is difficult to even imagine how much that is had, and what impact it has. Elon Musk, one of the greatest modern-day Lords of Our Land, is estimated to ‘have’ over $200 billion worth of accumulated ‘wealth.’ I find it hard to imagine how much 200,000,000,000 of anything would be: 200 billion grains of sand? drops of water? molecules of oxygen in the air? leaves in a forest?
The economic impact of such massive accumulations of wealth is only occasionally discussed. First, we have discussed the direct suppression of wages and benefits that took place with union-busting by the original corporate raiders, and then the less direct suppression by the placement of new factories and facilities in low wage and non-union areas (as in states with so-called Right to Work Laws and then foreign countries).
Second, an economy top-heavy with income distribution, often experiences a short-fall in demand, and this slows economic growth yearly by an estimated 2-4%. Rich people save more of their income than other Americans who largely spend their earnings on very concrete items as soon as they receive it. This spending has an immediate and direct stimulus effect on the economy. Large amounts of savings must find investment (or charitable) outlets that take time and are a less direct positive influence on production. As pointed out several times above, much “Wall Street” activity is just money chasing money; abstract forms of wealth breeding upon themselves. Prof. Reich often refers to much of Wall Street’s ‘wealth’ as gambling, as the “placing of bets” on the success or failure of other Wall Street ventures.
Finally, massive wealth accumulation skews much of an economy’s productive efforts into peculiar directions—like the Pharaoh’s of Egypt had their Pyramids, so Elon Musk has his SpaceX! I suggest that the governments of the Free World heavily tax, and provide no tax shelter, for the world’s super rich. This would take something akin to A New Progressive Era, granted, but with that redistribution of income solar panels, wind turbines, and electric-based transportation could be significantly subsidized around the world. Granted, SpaceX is “cool,” but so is saving the planet from massive climate change. Undoubtedly, we could think of a few other mundane (as in “worldly” and “ordinary”) projects that might also be worthy of the attention and income taken from other forms of modern-day cathedral- building. Excessive amounts of “savings” are always looking for extravagant forms of expenditure, as in the following:
(Top left, Musk’s Starship SN-15 making an upright landing! He envisions such a craft voyaging to Mars. Then rotating to the right, the tallest building in the world, Burj Khalifa in Dubai, over 1/2 mile high at 2,715 feet—tall and thin and used for luxury apartments, hotel, retail, offices. Prototype of a self-driving car. Bottom left, the Marina Bay Sands casino and resort in Singapore. Atop its three towers is The Sky Park that features restaurants, jogging paths, and the Infinity’s Edge swimming pool. Finally, the Volocopter, the prototype for a drone-like air taxi for two passengers and no pilot necessary; powered by eight battery-powered, small fan-like motors mounted along the circular track above it. ARE THESE “INNOVATIONS” REPRESENTATIVE OF A FUTURE GOOD FOR US ALL, and GOOD FOR THE PLANET, or a FUTURE BROUGHT TO US BY THE EXCESSIVE CAPITAL IN THE HANDS OF THE RICHEST 10%—1%—OF US? I fear it is the latter.)
There is much more to be said on these issues, and I plan to do some more reading on the topic. The overall impact of Globalization (US companies production facilities moving overseas, increased international trade, a global financial system…) is unclear. Several of the trends seem to be U.S. Consumers have benefitted by a drop in prices and a flood of low priced (in relative terms) products produced abroad. In this sense, the same American consumer can benefit by cheaper products but also be hurt by lower wages due to union-busting. Third World Countries can benefit by incoming manufacturing facilities, but also lose by the increased competition for their own companies from foreign giants.
But another of the trends that seems clear is that the world’s economic elite are Not, by and large, among the losers from globalization. The rich are getting richer.