Home > Uncategorized > Sympathy for the devil?

Sympathy for the devil?

from David Ruccio

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I have long argued (e.g., herehere, and here) that capitalism involves a kind of pact with the devil: control over the surplus is reluctantly given over to the boards of directors of corporations in return for certain promises, such as just deserts, economic stability, and wage increases for workers.

In recent years, as so often in the past, we’ve witnessed those at the top sabotaging the pact (simply because they have the means and interest to do so) and now, once again, they’ve undermined their legitimacy to run things.

First, they broke their promise of just deserts, as the distribution of income has become increasingly (and, to describe it accurately, grotesquely) unequal and the tendency toward high concentrations of wealth has returned, threatening to create a new class of plutocratic coupon-clippers. Then, they ended the Great Moderation with speculative decisions that ushered in the worst economic crisis since the First Great Depression. And, now, the promise of using the surplus to create jobs that would raise workers’ pay appears to be falling prey to directing the surplus to other uses: share buybacks and increasing CEO salaries.

According to a recent report by Goldman Sachs, stock repurchases will reach $1 trillion this year, up 46 percent from 2017 on the back of tax reform and strong corporate profits. Corporations buying back their own stocks leads to higher stock prices, which is an additional benefit to those who own the stocks—on top of the dividends they regularly receive.

As I explained earlier this year, the top 1 percent owned in 2014 almost two thirds of the financial or business wealth, while the bottom 90 percent had only six percent. That represents an enormous change from the already-unequal situation in 1978, when the shares were much closer: 28.6 percent for the top 1 percent and 23.2 percent for the bottom 90 percent). So, rising stock prices are both a condition and consequence of the obscene levels of inequality that obtain in the United States today.

And who loses? Workers, of course. A recent report from the National Employment Law Project calculated that McDonald’s could have paid each of its 1.9 million workers $4 thousand more a year if it had used the $21 billion it spent between 2015 and 2017 on stock buybacks to reward its workers instead. Starbucks could have given each of its workers a $7-thousand raise. With the money currently spent on buybacks, Lowe’s, CVS, and Home Depot could give each of their workers pay increases of at least $18 thousand a year.

But they’re not. Instead, corporations are using their enormous profits to repurchase their own stocks and, in addition, rewarding their executives with enormous pay increases.

According to Bloomberg, the median CEO-to-worker-pay ratio last year was 127 to 1 (at International Flavors & Fragrances Inc.). For U.S. corporations, the ratio ran from 0 (for Twitter, because CEO and cofounder Jack Dorsey received $0 in 2017) to 4,987-to-1 (at Mattel, where CEO compensation was $31,275,289).*

As it turns out, some of the most extreme examples of the gap between executive and median worker pay occurs at companies directly supported by federal contracts and subsidies. The latest Executive Excess report, published annually by the Institute for Policy Studies, found that at many federally funded companies the gap is far in excess of what ordinary American taxpayers find acceptable. For example, more than two-thirds of the top 50 government contractors and top 50 recipients of federal subsidies, receiving a total of $167 billion, currently pay their chief executive officer more than 100 times their median worker pay. At the top of the scale are leading military contractors, with the top bosses at Lockheed Martin, Boeing, General Dynamics, Raytheon, and Northrop Grumman each earning an average of $21 million, or between 166 and 218 times average worker pay.**

So, do Americans have any sympathy for the devil? The typical American believes CEO pay should run no more than six times average worker pay, according to the “2016 Public Perception Survey on CEO Compensation” at Stanford Business School (which mirrors a similar study by Sorapop Kiatpongsan and Michael Norton). Clearly, given the obscene ratios of CEO to average worker pay, Americans are no longer puzzled by corporations’ game. My guess is we’d see the same results if someone conducted a survey about stock repurchases. U.S. publicly traded companies across all industries spent almost 60 percent of their profits on buybacks between 2015 and 2017, while workers’ wages stagnated.

Sure, the tiny group at the top may present themselves as people of wealth and taste. But they’ve also shown they can lay waste to the economy they alone control, and they are clearly in need of some restraint. So, now, almost a decade into the current lopsided recovery—as they watch with glee their growing profits and an increasing gap between those who receive the surplus and everyone else—they deserve no sympathy whatsoever.

They’ve broken the pact and now their game is up.

 

*But Dorsey still owns a bundle of equity in Twitter, whose stock has increased in value 20 percent since the beginning of 2018. As of April 2 Dorsey owned 18 million shares of Twitter, currently worth $627 million as of Tuesday’s closing price. Dorsey also is the CEO of payments company Square, in which he owns 65.5 million shares, which currently would be worth $6 billion.

**The Geo Group, one of the primary contractors for the notorious immigrant family detention centers, took in $663 million in Justice Department and Homeland Security contracts in 2017. Geo CEO George Zoley pocketed $9.6 million that year, 271 times more than his company’s median worker pay of $35,630.

  1. September 6, 2018 at 1:01 am

    There is only one way out of this for the upper class;

    Every last copy of the christmas story about Tiny Tim must be found and burned. Children must be raised to ignore poor children scroogily given a lump of coal for christmas, after a twelve hour working day.

    No mention of cruel rich people who sell a tiny plastic vial of 1950’s sulfa base ear drop medicine for $70 over what insurance covers will ever be compared to rich capitalists who destroy democracies while working at golden sacks.

  2. Helen Sakho
    September 6, 2018 at 1:51 am

    You are both correct dear colleagues. The list of should be scrapped in the English-speaking world is endless. Examples include the original Sesame Street (now practically non-existent), Mind Your Language (actually banned many years ago for not being PC), and many more.

    Luckily for Economists, the Simpsons, the Brittas Empire, Bread, have not yet been banned.

    Equally importantly, The FIRST imported Governor of the BOE did eventually declare that he has made up his mind! The poor soul has decided to govern until further notice and beyond!

    What can we except from the MASTERS of finance capital, rentier profits, and reactive currency markets? Globalisation did always mean just that, did it not? The Globe is connected. Let us teach our students what connects and what divides it. Could it possibly be the real issues that face us all globally? Issues such as destitution, famine, poverty, imminent further genocides or threats of further chemical attacks by a handful of powerful men (and women who act as the alpha male) making sure that all goes according to plan?

    Perhaps we can add these or similar issues to our new curriculum as plausible questions to consider.

  3. Craig
    September 6, 2018 at 5:19 am

    I would be the last person to condone the current state of finance capitalism as I have repeatedly called for a new financial, monetary and economic paradigm. However, the actual and necessary route toward paradigm change and the end of finance capitalism lies in the thorough integration of opposites in the descriptive ways I have posted here many times….not merely reaction to it.

  4. Prof Dr James Beckman, Germany
    September 6, 2018 at 7:12 am

    My view is that everything is a trade-off. Most of us have been/still are profs, meaning work assuming job stability & lots of time to do what you love: teaching/administration/research. It normally is not a high stress/high effort (hourly sense) activity like management consulting. I was recently turned down for a few months with one of the largest consulting firms because they thought I would be unwilling or unable to work 80 hour weeks with commute time added. They were probably right. All of my younger tech/finance friends work under enormous pressure for enormous numbers of hours–they expect & receive very generous compensation. Magnify that by millions & you have our world, it seems to me.

    • Robert Locke
      September 6, 2018 at 9:30 am

      Publish or perish is a high stress job. Teaching is only one aspects of the job, research and publication in my field (history) required long hours and achievement, or no career. The problem in academia came from managerialism, when the professors lost control over universities.

  5. Helge Nome
    September 7, 2018 at 6:39 am

    It is ultimately a question of lifestyle choice by the individual. Each and every one of us lives (or dies) with the consequences.

  6. Helen Sakho
    September 7, 2018 at 11:37 pm

    We do indeed. I do believe that the very last thing on our mind will be how much money we have. Money does not grow on trees. Even if it did (my reference here is some of the above) comments, you would not think of publish or perish scenarios. Those perished a long, long time ago. PERISH or PERISH is the mode. No disrespect to anyone is intended here. You are all right. It is just that right now millions of innocent lives are about to PERISH. This is in addition to others before them. All we leave behind (that is those of us not in danger of immediate disappearance) is our work, tenured or not when we were still breathing.
    Please correct me if I am wrong. Such has been the case throughout human history.

    • Prof Dr James Beckman, Germany
      September 8, 2018 at 8:02 am

      Helen, I would add our students & others whom we have influenced–and who have influenced us. These we leave behind. Also, Einstein did his first seminal work when a clerk in a patent office. If people are not paramountly interested in ideas, then they are careerists–which of course is what most professors are when push comes to shove. When I walk German graves I sometimes see names like “Prof Dr, Dr, Dr (h.c.), habil. Schmidt” Two PhD’s, one Honorary PhD, a habilitation which means a published work worthy of giving professional standing (started about 1682). That’s a lot of preparation, and presumably the gentleman offered great insights–but because all certifications came from authorities at various moments in time, no guarantee that NEW ideas were offered, which is really what we seek, do we not?

      • Frank Salter
        September 8, 2018 at 8:35 am

        How are NEW valid ideas to be recognised? I suggest this is a significant part of the problem!

      • Prof Dr James Beckman, Germany
        September 8, 2018 at 1:04 pm

        Frank, you’ve hit the nail on the head. “Careerists” are not intentional change agents as there are presumably enormous risks to their careers. I’ve had many papers rejected by an editor saying, “We don’t print such (non-standard?) ideas,” or “I’d lose this editorship if I let those ideas into my journal”. Thus, we as readers are served pablum for the most part, I have noticed.

  7. Helen Sakho
    September 8, 2018 at 2:18 pm

    I thoroughly agree dear Professor.

  8. September 14, 2018 at 8:31 am

    There was never any sort of deal between businesses and government. And especially not between businesses and the American people. Beginning as the inception of the nation, local communities could and did control local businesses. Larger businesses are controlled at both national and state levels.

    When American colonists declared independence from England in 1776, they also freed themselves from control by English corporations that stole their wealth and dominated trade. After fighting a revolution to end this exploitation, most Americans retained a healthy fear of corporate power and prudently limited corporations exclusively to a business role. Corporations were forbidden from attempting to influence elections, public policy, and other realms of civic society.

    Initially, the privilege of incorporation was granted selectively to enable activities that benefited the public, such as construction of roads or canals. Enabling shareholders to profit was a means to that end. The states also imposed conditions (some of which remain on the books, though unused) like these:

    • Corporate charters (licenses to exist) were granted for a limited time and could be revoked promptly for violating laws.
    • Corporations could engage only in activities necessary to fulfill their chartered purpose.
    • Corporations could not own stock in other corporations nor own any property that was not essential to fulfilling their chartered purpose.
    • Corporations were often terminated if they exceeded their authority or caused public harm.
    • Owners and managers were responsible for criminal acts committed on the job.
    • Corporations could not make any political or charitable contributions nor spend money to influence law-making.

    For 100 years after the American Revolution, legislators maintained tight control of the corporate chartering process. Because of widespread public opposition, early legislators granted very few corporate charters, and only after much debate. Citizens governed corporations by detailing operating conditions not just in charters but also in state constitutions and state laws. Incorporated businesses were prohibited from taking any action that legislators did not specifically allow.

    States also limited corporate charters to a preapproved number of years. Unless a legislature renewed an expiring charter, the corporation was dissolved, and its assets were divided among shareholders. Citizen authority clauses limited capitalization, debts, land holdings, and sometimes, even profits. They required a company’s accounting books to be turned over to a legislature upon request. The power of large shareholders was limited by scaled voting, so that large and small investors had equal voting rights. Interlocking directorates were outlawed. Shareholders had the right to remove directors at will.

    In Europe, charters protected directors and stockholders from liability for debts and harms caused by their corporations. American legislators explicitly rejected this corporate shield. The penalty for abuse or misuse of the charter was not a plea bargain and a fine, but dissolution of the corporation.

    In 1819 the U.S. Supreme Court tried to strip states of this sovereign right by overruling a lower court’s decision that allowed New Hampshire to revoke a charter granted to Dartmouth College by King George III. The Court claimed that since the charter contained no revocation clause, it could not be withdrawn. The Supreme Court’s attack on state sovereignty outraged citizens. Laws were written, or re-written and new state constitutional amendments passed to circumvent the (Dartmouth College v Woodward) ruling. Over several decades starting in 1844, nineteen states amended their constitutions to make corporate charters subject to alteration or revocation by their legislatures. By 1855 it seemed that the Supreme Court had gotten the people’s message when in Dodge v. Woolsey it reaffirmed state’s powers over “artificial bodies.”

    But the people running corporations pressed on. Contests over charter were battles to control labor, resources, community rights, and political sovereignty. More and more frequently, corporations were abusing their charters to become conglomerates and trusts. They converted the nation’s resources and treasures into private fortunes, creating factory systems and company towns. Political power began flowing to absentee owners, rather than community-rooted enterprises.

    The industrial age forced a nation of farmers to become wage earners, and they became fearful of unemployment–a new fear that corporations quickly learned to exploit. Company towns arose. and blacklists of labor organizers and workers who spoke up for their rights became common. When workers began to organize, industrialists and bankers hired private armies to keep them in line. They bought newspapers to paint businessmen as heroes and shape public opinion. Corporations bought state legislators, then announced legislators were corrupt and claimed they used too much of the public’s resources to scrutinize every charter application and corporate operation.

    Government spending during the Civil War brought these corporations fantastic wealth. Corporate executives paid “borers” to infest Congress and state capitals, bribing elected and appointed officials alike. They pried loose an avalanche of government financial largesse. During this time, legislators were persuaded to give corporations limited liability, decreased citizen authority over them, and extended durations of charters.

    Attempts were made to keep strong charter laws in place, but with the courts applying legal doctrines that made protection of corporations and corporate property the center of constitutional law, citizen sovereignty was undermined. As corporations grew stronger, government and the courts became easier prey. They freely reinterpreted the U.S. Constitution and transformed common law doctrines.

    One of the most severe blows to citizen authority arose out of the 1886 Supreme Court case of Santa Clara County v. Southern Pacific Railroad. Though the court did not make a ruling on the question of “corporate personhood,” thanks to misleading notes of a clerk, the decision subsequently was used as precedent to hold that a corporation was a “natural person.” This story was detailed in “The Theft of Human Rights,” a chapter in Thom Hartmann’s book Unequal Protection.

    From that point on, the 14th Amendment, enacted to protect rights of freed slaves, was used routinely to grant corporations constitutional “personhood” and protection. Justices have since struck down hundreds of local, state and federal laws enacted to protect people from corporate harm based on this illegitimate premise. Including the Citizens United v. FEC decision. Armed with these “rights,” corporations increased control over resources, jobs, commerce, politicians, even judges and the law.

    A United States Congressional committee concluded in 1941, “The principal instrument of the concentration of economic power and wealth has been the corporate charter with unlimited power….” Many U.S.-based corporations are now transnational, but the corrupted charter remains the legal basis for their existence.

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