10/10 – Saving Capitalism For the Many Not the Few by Robert B. Reich
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This was a fantastic read. Reich presents an argument that the rules that govern society today are heavily skewed towards the powerful, and that the way to address the widening structural inequality is not to continue to pit the ideas of “free-market” and “big government” against each other, but to understand that markets are never truly free. Once understood, the choice isn’t a matter of one or the other, but a question of how best government should regulate markets to benefit society.
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.
Even the modern corporation, and its ownership, is part of the property mechanism – a consequence of particular decisions by legislatures, agencies, and courts that people who invest in the corporation are entitled to a share of its profits and that their personal property beyond those investments is protected if the corporation can’t pay its debts. The “free market” doesn’t dictate this. Property and contract rules do.
Property – the most basic building block of the market economy – turns on political decisions about what can be owned and under what circumstances.
The second building block of a market economy follows directly from the first. Businessmen and -women need some degree of market power in order to be induced to take the risks of starting new businesses.
“What do I care about the law?” Vanderbilt infamously growled. “Hain’t I got the power?”
Forty-eight of the seventy-three men who held cabinet posts between 1868 and 1896 either lobbied for railroads, served railroad clients, sat on railroad boards, or had relatives who were connected to the railroads.
Contracts are a third building block of capitalism. They are agreements between buyers and sellers to provide something in exchange for something else. If property and market power lie at the heart of capitalism, contracts are its lifeblood – the means by which trades are made and enforced.
Bankruptcy is the fourth basic building block of the market. It reflects a trade-off between competing goals, as do the other market rules.
Markets are made by human beings – just as nations, governments, laws, corporations, and baseball are the products of human beings.
The idea of a “free market” separate and distinct from government has functioned as a useful cover for those who do not want the market mechanism fully exposed.
Since the mid-1990s, a steadily larger portion of CEO pay has come in the form of shares of corporate stock, which boards have eagerly doled out to CEOs and other top executives in the form of stock options (activated when share prices reach a certain level). When share prices dip, boards readily provide additional options and awards to make up for the losses, so that when share prices rise again – even if the rise is temporary – CEOs can realize the gains by copiously cashing out.
This form of pay gives CEOs a significant incentive to pump up the value of their firms’ shares in the short run, even if the pumping takes a toll over the longer term.
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.
Corporations must disclose publicly when boards have approved buybacks and the overall amounts, but they do not have to announce when they are actually entering the stock market to buy back shares of stock.
Share prices can rise without investors having any idea buybacks are the cause. Yet CEOs can use their own inside knowledge of when the buybacks will occur and how large they’ll be in order to time their own stock sales and exercise their own stock options.
… studied 1,500 large companies and how they performed, in three-year periods, from 1944 to 2011. They then compared these companies’ performance to other companies in their same fields. They discovered that the 150 companies with the highest-paid CEOs returned about 10 percent 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 percent worse than their peer companies, on average.
If we are able to rid ourselves of the notions that the “free market” exists separately from government, and that people earn what they are worth to society, it will be possible for Americans to view more clearly the underlying choice: not more or less government, but a government responsive either to the demands of a wealthy minority becoming ever wealthier or to the needs of a majority that is becoming relatively poorer and less economically secure.
Countervailing power would also seek to end the upward predistributions currently embedded in market rules, such as those we have examined. The lengths of patent and copyright protection would be shortened, for example, and pay-for-delay agreements banned, as they are in most other advanced economies. Patents could not be extended by means of small or cosmetic changes in products or processes, and pharmaceutical companies would be prohibited from advertising their prescription brands, as had been the rule in the United States until Big Pharma insisted otherwise.
For the last thirty years, almost all incentives operating on the corporation have resulted in lower pay for average workers and higher pay for CEOs and other top executives. 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.
CEOs do not create jobs. Their customers create jobs by buying more of what their companies have to sell, giving the companies cause to expand and hire. So pushing companies to put less money in the hands of their CEOs and more into the hands of their average employees creates more purchasing power among people who will buy, and therefore more jobs.